Tax law changes.

North Carolina
2001 Tax Law Changes
North Carolina Department of Revenue
Tax Administration
North Carolina Department of Revenue
Tax Administration Page 1 2001 Tax Law Changes
PREFACE
This document is designed for use by personnel in the North Carolina
Department of Revenue. It is available to those outside the Department as a
resource document. It gives a brief summary of the following tax law changes:
( 1) Changes made by prior General Assemblies that take effect for tax
year 2001. Each change enacted by a prior General Assembly is also
discussed in the Department’s Tax Law Change document for the year
the change was enacted.
( 2) Changes made by the 2001 General Assembly, regardless of when
they take effect.
The changes are listed by type of tax. The order of the tax types is their order in
the General Statutes, except for local sales and use tax changes. The local
sales and use tax changes follow the State sales and use tax changes, and both
changes are grouped under the heading “ Sales and Use Tax.” Within a tax type,
the changes are listed in numerical order. The document does not include law
changes that affect the Department of Revenue but do not affect the tax laws.
For further information on a tax law change, refer to the legislation that made the
change. Administrative rules, bulletins, directives, and other instructions issued
by the Department, as well as opinions issued by the Attorney General’s Office,
may provide further information on the application of a tax law change.
The General Assembly began its 2001 session on January 24, 2001, and
adjourned on December 6, 2001. Under Article II, Section 22( 7) of the North
Carolina Constitution, the Governor then had 30 days to sign or veto the bills
enacted during the final days of the session. The Governor signed the last of the
tax bills on January 4, 2002.
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Table of Contents
Type of Tax Page
I. Estate Tax........................................................................................... 3
II. Privilege Tax ....................................................................................... 3
III. Alcoholic Beverage License and Excise Taxes................................... 4
IV. Corporate Franchise Tax .................................................................... 5
V. Tax Incentives for New and Expanding Businesses ........................... 8
VI. Business and Energy Tax Credits....................................................... 25
VII. Historic Rehabilitation Tax Credits ...................................................... 26
VIII. Corporate Income Tax ........................................................................ 27
IX. Individual Income Tax ......................................................................... 31
X. Tax Credits for Qualified Business Investments ................................. 34
XI. Withholding of Income Tax ................................................................. 35
XII. Estimated Income Tax - Corporations................................................. 35
XIII. Sales and Use Tax.............................................................................. 36
XIV. Highway Use Tax ................................................................................ 76
XV. Scrap Tire Disposal Tax...................................................................... 79
XVI. White Goods Disposal Tax ................................................................. 80
XVII. Dry- Cleaning Solvent Tax ................................................................... 81
XVIII. Piped Natural Gas Excise Tax ........................................................... 81
XIX. Mill Machinery Tax .............................................................................. 82
XX. Gift Tax .............................................................................................. 83
XXI. Insurance Premiums Tax .................................................................... 83
XXII. Excise Tax on Conveyances............................................................... 85
XXIII. General Administration ....................................................................... 85
XXIV. Property Tax ....................................................................................... 90
XXV. Motor Fuels Tax .................................................................................. 98
XXVI. Debt Set- Off ........................................................................................ 100
XXVII. Studies ................................................................................................ 100
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I. ESTATE TAX
No State law changes: The federal Economic Growth and Tax Relief
Reconciliation Act of 2001, signed into law on June 7, 2001, makes changes to
the federal estate and gift tax laws. These changes do not apply to the North
Carolina estate tax law because of the definition of Code in G. S. 105- 32.1( 1) and
G. S. 105- 228.90( 1a). The term “ Code” as defined in those statutes means the
Internal Revenue Code as enacted as of January 1, 2001. The June 7, 2001
federal changes were enacted after January 1, 2001, and therefore do not apply
to North Carolina law. In order for the June 7, 2001 federal changes to apply to
North Carolina, the General Assembly must enact legislation changing the
reference date of the Code. In the absence of this legislation, the Department
will not follow the federal changes.
II. PRIVILEGE TAX
G. S. 105- 111 - Repeal: This statute was repealed because it is unnecessary.
Its provisions either repeat other statutes or are obsolete. Subsection ( a) of the
section is unnecessary because G. S. 105- 104 describes the Secretary’s role in
administering the privilege taxes. Subsection ( b) describes an obsolete process
for issuing privilege licenses. Privilege licenses are generated by the
Department’s integrated tax system rather than through the use of blank
certificates. Subsection ( c) describes an obsolete procedure for issuing
duplicate privilege licenses. The Department issues a duplicate by reprinting the
notice to the taxpayer that contains the privilege license and will continue to
follow this procedure.
( Effective September 14, 2001; SB 165, ss. 2 and 53, S. L. 01- 414.)
G. S. 105- 113.21( a) – Technical Change: This subsection was amended to
make it clear that in order for a distributor of cigarettes to receive a four percent
discount as reimbursement for expenses incurred for preparing records and
furnishing a bond, the taxpayer must pay the tax on time. Before this change,
the law did not specifically require the payment to be timely to qualify for the
discount. The change made to this subsection parallels the changes made to
other statutes that allow payment discounts. Every statute that allows a payment
discount was changed to make it clear that the discount applies only if the tax is
timely paid.
( Effective September 14, 2001; SB 165, ss. 3 and 53, S. L. 01- 414.)
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G. S. 105- 113.39 – Technical Change: This section was amended to make it
clear that in order for a distributor of other tobacco products to receive a four
percent discount as reimbursement for expenses incurred for preparing records
and furnishing a bond, the taxpayer must pay the tax on time. Before this
change, the law did not specifically require the payment to be timely to qualify for
the discount. The change made to this section parallels the changes made to
other statutes that allow payment discounts. Every statute that allows a payment
discount was changed to make it clear that the discount applies only if the tax is
timely paid.
( Effective September 14, 2001; SB 165, ss. 4 and 53, S. L. 01- 414.)
III. ALCOHOLIC BEVERAGE LICENSE AND EXCISE TAXES
G. S. 105- 113.80( c) – Rate Reduction and Conforming Change: This
subsection was amended in two ways. First, the excise tax rate on liquor sold in
ABC stores was reduced from 28% to 25%, effective February 1, 2002. The
excise tax was reduced because of the enactment of G. S. 105- 164.4( a)( 7),
which levies a 6% State sales tax on spirituous liquor effective December 1,
2001. Second, the language exempting spirituous liquor from sales and use
taxes was deleted. The deletion of this language is a conforming change
necessitated by the levy of the new sales tax on liquor.
( Excise tax reduction effective February 1, 2002, and conforming change
effective December 1, 2001; SB 1005, ss. 34.23( c), ( d), and ( e), S. L. 01- 424.)
G. S. 105- 113.81A - Increase in Wine Tax Proceeds Earmarked for Grape
Growers Council: This section was amended to increase the amount of wine
tax proceeds earmarked for the Grape Growers Council. Under prior law, the
Department of Revenue credited to the Department of Agriculture and Consumer
Services on a quarterly basis 94% of the net proceeds of the excise tax collected
on unfortified wine and 95% of the net proceeds of the excise tax collected on
fortified wine bottled in North Carolina during the previous quarter. The amount
credited could not exceed $ 175,000 annually. As amended, the amount credited
is 100% of the net proceeds of both unfortified and fortified wine bottled in North
Carolina and the annual maximum is $ 350,000.
( Effective October 1, 2001, for distributions made on or after that date; SB 970,
s. 1, S. L. 01- 475.)
G. S. 105- 113.85 – Technical Change: This subsection was amended to make
two technical changes. The first change makes it clear that in order for a
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wholesaler or importer of malt beverages or wine to receive a four percent
discount as reimbursement for expenses incurred for preparing records and
furnishing a bond, the taxpayer must pay the tax on time. Before this change,
the law did not specifically require the payment to be timely to qualify for the
discount. The change made to this section parallels the changes made to other
statutes that allow payment discounts. Every statute that allows a payment
discount was changed to make it clear that the discount applies only if the tax is
timely paid. The second technical change makes the wording of the statute
gender- neutral.
( Effective September 14, 2001; SB 165, ss. 5 and 53, S. L. 01- 414.)
IV. CORPORATE FRANCHISE TAX
G. S. 105- 114( c)- Corporate Members of LLCs: This new subsection requires a
corporation that is a member of a limited liability company ( LLC) and is entitled to
receive at least 70% of the LLC’s assets upon dissolution to include the LLC’s
assets in the corporation’s franchise tax base. The member corporation’s
investment in the LLC is excludible from the computation. The new subsection
also provides that a taxpayer that underpays the franchise tax due under this
subsection because of fraud with intent to evade tax is guilty of a Class H felony.
This criminal sanction would apply in the absence of this specific language by
operation of G. S. 105- 236( 7).
This subsection was enacted out of concern for the erosion of the franchise tax
base. The legislation enacting new subsection ( c) states that some taxpayers
“ take advantage of an unintended loophole in the law and avoid franchise tax by
transferring their assets to a controlled limited liability company.” The potential
erosion stems from the exemption of LLCs from the franchise tax and the ability
of corporations to transfer assets to single- member LLCs of which the
corporations are the single members. This can reduce the corporation’s
franchise tax liability under the calculation based on investment in tangible
property.
The changes made by this subsection are a modification of a recommendation of
the North Carolina Efficiency and Loophole- Closing Commission. That
Commission, co- chaired by former Governors Jim Holshouser and Bob Scott and
former State Treasurer Harlan Boyles, recommended that all LLCs be subject to
the franchise tax and that the annual report fee for LLCs be reduced from $ 200
to $ 20.
( Effective January 1, 2002, and applies to taxes due on or after that date; HB
1157, s. 2, S. L. 01- 327.)
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G. S. 105- 116- Accelerated Payments by Electric Companies and Technical
Changes: Subsections ( b) and ( d) of this section were amended to revise the
payment schedule for electric power companies and to make technical changes.
The purpose of the revised payment schedule is to require more frequent
payments, thereby shifting the receipt of some tax revenue from the 2002- 03
fiscal year into the end of the 2001- 02 fiscal year.
Amended subsection ( b) requires electric power companies to pay their gross
receipts taxes on electricity in accordance with the same schedule by which they
pay sales and use taxes on electricity. G. S. 105- 164.16 sets out the payment
schedule for sales and use taxes. It requires a taxpayer that consistently remits
at least $ 10,000 a month in sales and use taxes to pay the taxes twice a month.
By application of G. S. 105- 241( b)( 2), these semimonthly payments must be
made by electronic funds transfer. The sales tax law requires a taxpayer who
remits between $ 100 and $ 10,000 a month to pay on a monthly basis, and
requires all other taxpayers to pay on a quarterly basis.
Before this change, all electric power companies paid their gross receipts
franchise taxes on a monthly basis and filed a quarterly return. With the
changes, electric power companies will pay on a semimonthly, monthly, or
quarterly basis depending on their payment schedule for sales and use taxes
and will continue to file a return on a quarterly basis. Because electric power
companies typically remit large amounts of sales tax on electricity, they will likely
pay their sales tax on a semimonthly basis. As a result, they will be required to
pay their gross receipts franchise tax on a semimonthly basis as well. They will
continue to file a franchise return on the same quarterly schedule, however,
because the due date of the quarterly return has not changed. The return is due
by the last day of the month following the end of the quarter.
The penalty for underpayments has been revised to accommodate the new
semimonthly payment periods. Before this change, an electric power company
was not subject to interest and penalty on an underpayment for a monthly
payment period if it paid at least 95% of what was due and paid the remainder
when filing the quarterly return. As revised, an electric power company is not
subject to interest and penalty on an underpayment for a semimonthly or
monthly payment period if it timely pays at least ninety- five percent of the amount
due for each period and includes the underpayment with next quarterly return.
The changes made to the payment schedule for electric power companies do not
affect water and sewerage companies. These companies will continue to file
and pay on a quarterly basis.
In rewriting this section to revise the payment schedule, several technical
changes were made. First, references in the section to a quarterly “ report” were
changed to a quarterly “ return.” This change is part of the continuing effort to
refer to all tax forms submitted by taxpayers as tax returns rather than tax
reports. Second, the sentence requiring taxpayers to report on an accrual basis
was moved from the paragraph in subsection ( b) following the numbered
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subdivisions to the paragraph preceding the numbered subdivisions. Third, the
language requiring the Secretary to determine a practical method of allocating
gross receipts to a city if the taxpayer fails to do so was removed from
subsection ( b) and inserted in subsection ( d).
( Effective January 1, 2002; HB 232, ss. 6( c), ( d), and ( j), S. L. 01- 427.)
G. S. 105- 116.1- Conforming Changes to Gross Receipts Tax Distribution to
Cities: This section was amended to reflect the repeal of the gross receipts
franchise tax on telephone companies, formerly set out in G. S. 105- 120.
Effective January 1, 2002, the telephone franchise tax is repealed and replaced
with an increased sales tax on telecommunications service.
This section was amended to delete references to telephone companies and to
G. S. 105- 120, so that the distribution under this section applies only to receipts
from electric power companies. In addition, the section was amended in various
places to insert language clarifying that the computation and allocation of the
hold- harmless adjustment for the city distribution includes only receipts from
electric power companies and natural gas companies.
As a result, the hold- back amount for a city will be adjusted to delete the portion
attributable to telephone receipts and the adjusted amount will be taken only
from receipts from electric power companies and piped natural gas companies.
New G. S. 105- 164.44F addresses the freeze deduction for receipts from the
repealed franchise tax on local telecommunications service.
( Effective January 1, 2002, and applies to taxable services reflected on bills on
or after that date; HB 571, s. 11, S. L. 01- 430.)
G. S. 105- 120- Telephone Tax Amended and then Repealed: The General
Assembly amended this section to make the same changes in the payment
schedule for telephone companies that it made for electric power companies in
G. S. 105- 116. It then repealed this section as part of the telecommunications
reform legislation that consolidates all the taxes on telecommunications services
into a single State sales tax at the rate of 6%. As a result, the amendments
never went into effect. New G. S. 105- 164.4B sets out the consolidated
telecommunications tax.
( Amendments effective January 1, 2002; HB 232, s. 6( e), S. L. 01- 427; repeal
effective January 1, 2002; HB 571, s. 12, S. L. 01- 430, and HB 338, ss. 118 and
126, S. L. 01- 487.)
G. S. 105- 122( d1)- Technical and Clarifying Changes: This subsection was
amended to delete an obsolete reference to Part 5 of Article 4 of Chapter 105 of
the General Statutes. That Part sets out the tax credits for qualified business
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investments. The reference to that Part is obsolete because the tax credits for
qualified business investments can be claimed only against individual income
tax. A C corporation is therefore not eligible for the tax credits for qualified
business investments. An S corporation, as a pass- through entity, can qualify for
the credits but the credits must be claimed by the S corporation shareholders
against individual income tax.
The subsection was also amended to clarify the tax credit for one- half the piped
natural gas excise tax. The amendment makes it clear that this credit is subject
to the general limitation that a tax credit cannot exceed the amount of tax and is
therefore not refundable.
( Effective September 28, 2001; HB 232, s. 12, S. L. 01- 427.)
V. TAX INCENTIVES FOR NEW AND EXPANDING
BUSINESSES
Article 3A
G. S. 105- 129.2 – Clarifying, Substantive, and Technical Changes: This
section was amended to clarify the “ primary business” requirement for eligibility
for the Article 3A credits and then to make exceptions to that requirement for tax
years beginning in 2001 or later.
Primary Business Clarification. - This amendment makes it clear that a taxpayer
is eligible for most of the tax credits in Article 3A only if the primary business of
the taxpayer is an eligible business. There had been some confusion in the past
as to whether a taxpayer had to be both primarily engaged in a qualifying
business and performing the activity qualifying for a credit in that business to be
eligible for a credit. Some taxpayers believed that the credits were site- specific,
meaning that their primary business did not matter as long as they were in a
qualifying business at the site of the activity.
The amendment makes it clear that for tax years prior to 2001, a taxpayer had to
be both primarily engaged in a qualifying business and be conducting that
business at the site of the activity to be eligible for any of the Article 3A credits
except for the credit for investing in central office or aircraft facility property or the
credit for contributing to a development zone project. This clarification is
consistent with the Department of Revenue’s long- standing interpretation and is
not considered a change to current law. The legislation sets out a finding by the
General Assembly that the amendments concerning primary business “ clarify the
intent of the existing law and do not represent a change in the law.”
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Substantive Changes. - The substantive amendments to this section are
effective for tax years 2001 and later. They remove the requirements regarding
primary business from five of the definitions, add three new definitions, and
amend three of the existing definitions. The amendments remove the primary
business requirement from the definitions of “ air courier services,” “ data
processing,” “ electronic mail order house,” “ manufacturing,” “ warehousing,” and
“ wholesale trade.” These requirements are removed from this section because
they are incorporated in G. S. 105- 129.4( a) with some modifications. See the
discussion of G. S. 105- 129.4( a) for an explanation of the changes to the primary
business requirement.
One of the two new definitions is for “ computer services” and one of the
amended definitions is the term “ data processing.” The definition of the term
“ computer services” includes four of the five NAICS industry groups previously
included in the definition of “ data processing.” The new term “ computer services”
includes computer systems design and related services, software publishing,
software reproducing, and on- line information services.
The amended definition of “ data processing” is not tied to NAICS and consists of
six new types of businesses. The six are data entry and preparation; database
creation, conversion, and management; data capture and imaging; rental of
computer processing time; conversion of data storage media; and conversion of
data file format. The term does not include payroll services, text processing,
desktop publishing, or financial transaction processing.
A new limitation applies to both computer services and data processing. For a
taxpayer in either of these industries to qualify for an Article 3A credit, the
taxpayer must provide the services primarily to persons who are not related
entities.
The other new definitions are for “ establishment” and “ related entity.” As
defined, the term “ establishment” has the same meaning as in NAICS. The term
“ related entity” was added as a result of the new limitation on eligibility for
businesses engaged in computer services or data processing. As defined, the
term “ related entity” has the same meaning as in new G. S. 105- 130.7( a).
The other amended definitions are “ customer service center” and “ NAICS.” The
term “ customer service center” was amended to delete the reference to an
auxiliary subdivision and replace it with a reference to the new term
establishment. This change was made because the term “ auxiliary subdivision”
was not defined and was not clear.
The amendment to the definition of NAICS pegs the NAICS to a certain date.
The date set is December 31, 1997. This change parallels the treatment of the
Internal Revenue Code, which is tied to a certain date set in G. S. 105-
228.90( b)( 1a). The change was made to avoid any issue of an impermissible
delegation of the taxing power.
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Technical Changes. – The technical changes renumber the subdivisions in the
section. The renumbering affects the definition of “ customer service center” and
all subsequent definitions in the section. Before the changes, the definition of
customer service center was designated as subdivision ( 3a). After the changes,
this definition is designated as subdivision ( 5). Subsequent definitions are
similarly affected.
( Clarifying changes effective November 29, 2001, SB 748, ss. 1( a) and ( c), S. L.
01- 476; substantive and technical changes effective for taxable years beginning
on or after January 1, 2001, SB 748, ss. 1( b) and ( c), S. L. 01- 476.)
G. S. 105- 129.2A – Conforming Changes and Change in Frequency of
Report: Subsections ( a), ( c), and ( d) of this section were amended to make
slight changes. Subsection ( a) was amended to provide that Article 3A of
Chapter 105 expires for business activities that occur on or after January 1,
2006. This change conforms with the change to G. S. 105- 129.6 that eliminates
the requirement that a taxpayer submit an application to the Department of
Commerce to claim the credits in Article 3A. The expiration date for Article 3A
remains the same.
Subsection ( c) was amended to update the economic recruitment data used by
the Department of Commerce in conducting its impact study of the effectiveness
of the tax credits. Before the amendment, the subsection required the use of
data ending in 2000. The change deletes the date “ 2000” and requires the use
of the most recent data.
Subsection ( d) was amended to require the Department of Commerce to conduct
an equity study and an impact study of the tax credits every two years. The
reports are due by April 1 of odd- numbered years. Before the change, the
subsection required the two reports to be submitted once on April 1, 2001.
( Effective November 29, 2001, SB 748, s. 2, S. L. 01- 476.)
G. S. 105- 129.3 – Information, Population, and Industrial Park Changes:
Subsections ( b), ( d), and ( e) of this section were amended. Subsection ( b) was
amended to require the Department of Commerce to publish the enterprise tier
designations of the counties rather than provide the information to the Secretary
of Revenue. This information was already available on the Department of
Commerce’s website at ww. nccommerce. com/ finance/ tiers/, so the change is a
technical change rather than a substantive change.
Subsection ( d) was amended to allow more flexibility in creating two- county
industrial parks. It was enacted for the benefit of Craven County and Jones
County. Any other county park that meets the revised description will benefit as
well. Under the law, when an industrial park is located in two counties, the park
has the lower tier designation of the two counties in which it is located if certain
conditions are met. Before this change, one of the conditions was a requirement
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that the lower- tiered county contribute at least one- half of the cost of developing
the park. Under the amendment, the lower- tiered county must contribute the
lesser of one- half the cost of developing the park or the proportion of the cost of
developing the park that is equal to the proportion of the park located in that
county. At least one- third of the park must be located in the county with the
lower tier designation.
Subsection ( e) was amended to benefit more counties. Under that subsection,
counties receive lower tier designations than they otherwise would if they meet
certain conditions. Under subdivision ( 1) of that subsection, counties with
populations that meet specified thresholds qualify as Tier One. One of the
specified thresholds is total population. This threshold was increased from
10,000 to 12,000. This change enables Alleghany County and Jones County to
qualify as Tier One counties.
Under subdivision ( 3) of subsection ( e), counties that would otherwise receive
designations as Tier Five or Tier Four counties can qualify as Tier Three
counties if their population does not exceed a specified threshold. This threshold
was increased from 25,000 to 35,000. This change enables Alexander, Dare,
Davie, Macon, and Transylvania Counties to qualify as Tier Three Counties.
( Information and population changes in subsections ( b) and ( e) effective
November 29, 2001, SB 748, s. 3, S. L. 01- 476; industrial park change in
subsection ( d) effective for taxable years beginning on or after January 1, 2001;
SB 538, S. L. 01- 94.)
G. S. 105- 129.3A – Publication of Development Zones and Technical
Change: This section defines development zones and authorizes the
Department of Commerce to designate areas as development zones.
Subsection ( b) was amended to require the Department of Commerce to publish
annually a list of all development zones with a description of their boundaries.
Subsection ( c) was amended to correct an incorrect cross- reference to the wage
standard. That standard is codified under G. S. 105- 129.4, not under G. S. 105-
129.3( b).
( Publication change effective November 29, 2001, SB 748, s. 4, S. L. 01- 476;
technical change effective September 14, 2001; SB 165, ss. 6 and 53, S. L. 01-
414.)
G. S. 105- 129.4( a) – Types of Eligible Businesses: This subsection was
rewritten to become the primary law for determining whether a taxpayer is in an
eligible business for purposes of the Article 3A credits. The eligible businesses
are divided into six categories. In some cases, the primary business requirement
remains the same; in other cases, the primary business requirement is relaxed.
The six categories and their requirements are as follows:
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( 1) Central office or aircraft facility. To be an eligible business, the
taxpayer must operate a central office or aircraft facility that creates at
least 40 new jobs and the jobs, investment, and activity with respect to
which a credit is claimed must be used in that office or facility. These
are the same requirements as under prior law.
( 2) Single business. This category consists of air courier services and
data processing. The taxpayer must be primarily engaged in one of
these businesses and the jobs, investment, and activity with respect to
which a credit is claimed must be used in that business. These are the
same requirements as under prior law for air courier services. The
requirements are also the same for the businesses included within
data processing, but the kinds of businesses included under data
processing have changed and data processing qualifies only if the
services are provided to an entity that is not a related. See the
discussion of G. S. 105- 129.2 for an explanation of those changes.
( 3) Multiple business. This category consists of manufacturing,
warehousing, and wholesale trade. Under prior law, the taxpayer had
to be primarily engaged in one of those businesses and the jobs,
investment, and activity with respect to which a credit was claimed had
to be used in that business. For example, a taxpayer primarily
engaged in manufacturing did not qualify for credits for jobs,
investment, and activity carried on at a warehousing site. Those
requirements are relaxed for these three businesses.
As amended, the taxpayer must be primarily engaged in one of those
businesses and the jobs, investment, and activity with respect to
which a credit is claimed must be used in one of those businesses.
This means that a manufacturer qualifies for the credit if the jobs,
investment, and activity are carried on at a site at which the primary
activity is manufacturing, warehousing, or wholesale trade.
( 4) Single establishment. This category consists of computer services
and an electronic mail order house. The computer services must be
provided primarily to persons who are not related entities. The
electronic mail order house must create at least 250 new jobs and
must be located in a tier one, two, or three area. To be eligible for the
credits, computer services or an electronic mail order house must be
either the taxpayer’s primary business or the primary activity at an
establishment of the taxpayer and the jobs, investment, and activity
with respect to which a credit is claimed must be used in that
business.
( 5) Customer service center. To be an eligible business, the taxpayer
must satisfy all of the following requirements:
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The taxpayer’s primary business must be a telecommunications or
financial services company.
The customer service center must be the primary activity of an
establishment of the taxpayer located in a tier one, two, or three
area.
The jobs, investment, and activity with respect to which a credit is
claimed must be used in the establishment’s primary activity.
These are the same requirements as under prior law with one
exception. Under prior law, the establishment had to be in a tier one
or two area. Under the changes, the establishment can be in a tier
one, two, or three area.
( 6) Warehousing Option. This category is a second way for a taxpayer
engaged in warehousing to qualify for the credits. The multiple
business category includes a taxpayer whose primary business is
warehousing. This option applies if warehousing is not the primary
business of the taxpayer. This category was enacted for the benefit of
a specific taxpayer, but any taxpayer that meets the requirements is
eligible.
Under this option, the taxpayer is eligible for the credits if the taxpayer
satisfies the following requirements:
The primary activity of an establishment of the taxpayer is
warehousing.
The warehousing establishment is located in a tier one, two, or
three area and serves 25 or more establishments of the taxpayer
in at least five different counties in one or more states.
The jobs, investment, and activity with respect to which a credit is
claimed are used in the warehousing establishment.
( Effective for taxable years beginning on or after January 1, 2001; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( a1) – Changes Concerning New Job Creation: This
subsection was amended to make a clarifying change and a substantive
addition. The clarifying change concerns the period of time during which a
central office or aircraft facility may create the required 40 new jobs. The change
makes it clear that for a central office or aircraft facility, the 40 new jobs must be
created either ( i) within twelve months immediately following the date the
taxpayer first uses the property as a central office or aircraft facility or ( ii) if the
taxpayer uses temporary space during completion of the central office or aircraft
facility, within a 36- month period that includes the 24 months immediately
preceding and the 12 months immediately following the first use of the property
as central office or aircraft facility property. Under the prior law, it was not clear if
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the “ year” allowed for job creation was the taxpayer’s taxable year, the calendar
year, or a twelve- month period.
The substantive addition to this subsection establishes the minimum number of
jobs a taxpayer must create to qualify for the new tax credit for substantial
investment in other real property in G. S. 105- 129.12A and the time period in
which these jobs must be created. To qualify for the credit for substantial
investment in other real property, a taxpayer must create at least 200 additional
full- time employees to fill new positions at the location in a two- year period
beginning when the property is first used in an eligible business.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( a2) – Credit Expiration Changes: This subsection was
amended to make a clarifying change and a substantive change. The clarifying
change adds a sentence to make it clear that a subsequent change to the tier
designation of the area in which an establishment is located does not cause
installments of the credits to expire. This affects the new credit for substantial
investment in other property and the credits claimed by businesses with a
customer service center, an electronic mail order house, or certain warehousing
establishments. The new credit applies only in tier one and two areas. A
customer service center, an electronic mail order house, and a warehousing
establishment of a taxpayer whose primary business is not warehousing must be
in a tier one, two, or three area.
The substantive change establishes expiration provisions for installments of
credits claimed by a central office, an aircraft facility, or an electronic mail order
house. To qualify for an Article 3A credit, a central office or an aircraft facility
must create at least 40 new jobs and an electronic mail order house must create
at least 250 new jobs. Under the amendment, installments of a credit claimed by
one of these types of businesses expire when the number of jobs at the office,
facility, or house falls below the minimum threshold required to qualify. The
taxpayer may not take an expired installment.
For a central office or aircraft facility, this is a change from prior law. Before this
change, G. S. 105- 129.12( c) stated that installments of credits for a central office
or aircraft facility expired when the number of jobs at all the taxpayer’s central
office or aircraft facilities in this State dropped by 40 or more. For an electronic
mail order house, this change addresses an issue that was not addressed in the
prior law.
The new credit for substantial investment in other property, set out in G. S. 105-
129.12A, contains an expiration provision similar to the one amended in this
subsection. To qualify for the new credit, a business must create at least 200
new jobs. Under G. S. 105- 129.12A( c), an installment of that credit expires if the
number of jobs at the property falls below 200.
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( Effective November 29, 2001, and applies to tax years ending on or after that
date, SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.4( b)- Wage Standard Changes: This subsection was amended
to make various changes to the wage standard test and to require the
Department of Commerce to publish the wage standard for each county. The
changes to the wage standard consist of three clarifying changes, one
conforming change, and one substantive change. The first clarifying change
adds a sentence stating that no jobs tax credit is allowed for jobs not included in
the wage calculation.
The second clarifying change requires all positions that were filled for at least
1,600 hours during the calendar year in which the qualifying activity occurred to
be included in the calculation of whether all jobs at a location meet the wage
standard. This ensures that a taxpayer determines the average wage of
employees at a location based on all full- time jobs, including those subject to
seasonal layoffs. For tax years beginning before January 1, 2002, the average
wage for all jobs at a location was a factor in determining eligibility for credits
other than the jobs tax credit and the worker training credit, such as the credit for
investing in machinery and equipment. For tax year 2002 and subsequent tax
years, the average wage for all jobs at a location is also a factor in determining
eligibility for the jobs tax credit and the worker training credit, as explained in the
discussion of the substantive change to this subsection.
The third clarifying change deletes references to the time a taxpayer applies for a
credit and substitutes references to the calendar year in which the taxpayer
engages in a qualifying activity. Read literally, the law before this change
required the taxpayer to meet the wage standard for the year in which the
taxpayer applied for the credit, even if the taxpayer first claimed the credit on an
amended return filed two years after the original return. The Department did not
interpret these provisions literally, however. Instead, the Department construed
these provisions to mean the year in which the qualifying activity occurred.
The conforming change inserts a reference to the new credit for a substantial
investment in other property, set out in G. S. 105- 129.12A. The average wage of
all jobs at a location must meet the wage standard for a taxpayer to qualify for
the new credit.
The substantive change sets a new wage standard for the credit for creating new
jobs and the worker training credit, effective with tax year 2002. The new
standard is a two- part test. Under the new test, both the average wage of the
jobs for which the credit is claimed and the average wage of all jobs at the facility
must meet the wage standard.
( First and second clarifying changes effective September 14, 2001; SB 165, ss.
7 and 53, S. L. 01- 414; third clarifying change, conforming change, and
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substantive change to the wage standard effective for taxable years beginning
on or after January 1, 2002; SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.4( b1) – Large Investment Conforming Change – This
subsection was amended to conform with the changes to G. S. 105- 129.6. As
rewritten, that statute no longer requires the Department of Commerce to certify
a taxpayer’s eligibility for the Article 3A credits. To be eligible for the large
investment enhancements in Article 3A, a taxpayer must obtain a written
determination from the Department of Commerce that the taxpayer is expected
to meet the large investment thresholds.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( b2) – Health Insurance Conforming Change: This subsection
was amended to conform with the changes to G. S. 105- 129.6. As rewritten, that
statute eliminates the requirement that a taxpayer obtain a certification from the
Department of Commerce to claim the credits in Article 3A.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( b3) – Environmental Impact Conforming Change: This
subsection was amended to conform with the changes to G. S. 105- 129.6. As
rewritten, that statute eliminates the requirement that a taxpayer obtain a
certification from the Department of Commerce to claim the Article 3A credits.
Under prior law, the Department of Commerce reported to the Department of
Environment and Natural Resources ( DENR) those taxpayers who claimed on
their applications for certification to meet the environmental impact eligibility
requirements. As amended, DENR must annually report to the Department of
Revenue those persons who have pending actions concerning significant
violations or have had final determinations of responsibility for significant
violations during the last five years. The Department of Revenue can then use
the information provided by DENR when reviewing the returns on which tax
credits are claimed.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( b4) – Safety and Health Conforming and Substantive
Changes: This subsection was amended to make a substantive change and a
conforming change. The substantive change revises the safety and health
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eligibility requirements effective retroactively to tax year 2000. The change was
made to enable a particular taxpayer to qualify for the Article 3A credits.
To be eligible for the Article 3A credits, a taxpayer must have a good OSHA
record at the business location where the qualifying business activity occurs.
Under prior law, a good OSHA record meant that the taxpayer had no
outstanding OSHA citations and had no serious violations within the last three
years. As amended, the term means that the taxpayer has no citations that have
become a final order within the past three years for willful serious violations or for
failing to abate serious violations.
The conforming changes reflect the changes made to G. S. 105- 129.6. That
statute was rewritten to eliminate the requirement that a taxpayer obtain a
certification from the Department of Commerce to claim the Article 3A credits.
Under prior law, the Department of Commerce reported to the Department of
Labor ( DOL) those taxpayers who claimed on their applications for certification to
meet the safety and health eligibility requirements. As amended, DOL must
annually report to the Department of Revenue those employers who have had
final orders for serious violations within the past three years. The Department of
Revenue can then use the information provided by DOL when reviewing the
returns on which tax credits are claimed.
( Substantive change to eligibility requirements effective retroactively for taxable
years beginning on or after January 1, 2000; SB 748, s. 5, S. L. 01- 476;
conforming changes effective for taxable years beginning on or after January 1,
2002; SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.4( b5) – Eligibility for New Credit: This subsection was enacted
to establish eligibility requirements for the new credit for a substantial investment
in other real property, set out in G. S. 105- 129.12A. To be eligible for the new
credit, a taxpayer must obtain a written determination from the Department of
Commerce that the taxpayer is expected to make the necessary investment and
create the necessary new jobs within the required time periods. If the taxpayer
fails to make the required level of investment or timely create the required
number of new jobs, the taxpayer forfeits the credit.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( d) – Forfeiture Conforming Changes: This subsection was
amended to make two conforming changes. The first change reflects the
changes made to G. S. 105- 129.6. That statute was rewritten to eliminate the
requirement that a taxpayer obtain a certification from the Department of
Commerce to claim the Article 3A credits. As a result, this subsection was
amended to delete references to making an application for a tax credit and
certification by the Department of Commerce.
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The second conforming change adds a forfeiture provision for the new credit for
substantial investment in other property, set out in G. S. 105- 129.12A. That
credit requires the creation of 200 new jobs within two years and an investment
of at least $ 10 million within three years. The credit is forfeited if the taxpayer
does not meet either of these requirements.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( e) – Clarifying Change: This subsection was amended to clarify
the term “ business” for purposes of determining whether the business has
changed ownership. A business is either a taxpayer or an establishment. G. S.
105- 129.2 sets out the new definition of establishment.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( g) – Advisory Ruling: This subsection was enacted to inform
taxpayers that they can seek an advisory ruling from the Department of Revenue
regarding their eligibility for tax credits. A written ruling will enable a taxpayer to
determine in advance whether planned activity will qualify for a credit.
( Effective November 29, 2001; SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.5 – R& D Carryforward Extended, New Statute of Limitations,
and Conforming Changes: The catchline to this section was amended to add a
reference to the new statute of limitations, subsection ( c) was amended to make
substantive and conforming changes, and new subsection ( d) was added. New
subsection ( d) is effective for tax years beginning on or after January 1, 2001.
The other changes are effective for tax years beginning on or after January 1,
2002.
The substantive changes to subsection ( c) extend the carryforward period for the
tax credit for research development from five years to 15 years and insert a 20-
year carryforward for the new credit for a substantial investment in other
property, set out in G. S. 105- 129.12A. The conforming changes reflect the
changes made to G. S. 105- 129.6. That statute was rewritten to eliminate the
requirement that a taxpayer obtain a certification from the Department of
Commerce to claim the Article 3A credits. References in this subsection to
certification by the Department of Commerce were therefore deleted.
New subsection ( d) was enacted to establish a special statute of limitations for
claiming the Article 3A tax credits. Section 7( a) of Chapter 476 of the 2001
Session Laws states that the General Assembly finds that the purpose of the
Article 3A credits is to encourage the creation of new quality jobs and to
North Carolina Department of Revenue
Tax Administration Page 19 2001 Tax Law Changes
encourage new investment in machinery and equipment, research and
development, and real property and that “ allowing taxpayers to file amended
returns and retroactively claim credits under that Article does not further this
purpose of encouraging job creation and new investment.”
Under the new limitation, a credit must be claimed within six months after the
due date of the return on which the taxpayer can first claim the credit. The due
date includes extensions received by the taxpayer.
The return on which the taxpayer can first claim the credit is the return for the
year in which the taxpayer engages in the activity that qualifies for the credit.
This applies both to credits for which a taxpayer qualifies in one year and then
takes in installments in subsequent years and to credits that are taken in the year
in which the taxpayer engages in the activity that qualifies for the credit. Form
NC- 478 and the applicable NC- 478 letter series form must be filed within six
months after the due date of the return for the year in which the taxpayer
engages in the activity that qualifies for the credit.
This new requirement is a statute of limitations. It cannot be waived or extended
by the Department. The Department cannot accept a return on which an Article
3A tax credit is claimed unless the return is filed within the six- month time limit
set in this subsection.
( Changes to subsection ( c) effective for taxable years beginning on or after
January 1, 2002, and apply to credits that are first claimed on or after that date;
new subsection ( d) effective for taxable years beginning on or after January 1,
2001; SB 748, s. 7, S. L. 01- 476.)
G. S. 105- 129.6 – No Application Process, Fees Paid to DOR, and Reports
and Disclosure by DOR: This section was rewritten to eliminate the confusion
caused by having two different agencies, the Department of Commerce and the
Department of Revenue, involved in the tax credit process. The confusion is
eliminated by removing the Department of Commerce from the role of receiving
applications for tax credits, issuing certifications of approval, and reporting on
various aspects of the tax credits.
No Application for Certification. The step of applying for an Article 3A tax credit
is eliminated. Subsection ( a), which required a taxpayer to obtain a certification
from the Department of Commerce before claiming a tax credit, is repealed.
This change is effective for all business activities occurring on or after January 1,
2002, and it is effective for activities occurring before January 1, 2002, if the
taxpayer did not file an application with the Department of Commerce by January
1, 2002. The goal is to eliminate applications for certification for tax credits for
returns filed for tax year 2002.
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The year 2002, however, is a transition year for eliminating the application for
certification. As of January 1, 2002, some taxpayers had submitted applications
to the Department of Commerce for credits for which they qualified in tax year
2001 or an earlier year and some had not because they were waiting until closer
to the due date of the return in 2002 or because they had not yet filed an
amended return to claim a credit for a prior year. A taxpayer who had not filed
an application as of January 1, 2002, must still file an application with the
Department of Commerce if the taxpayer includes the tax credit on a return filed
in 2002. The application, however, is simply a method of collecting the required
fee. The Department of Commerce will not make any determinations about
eligibility based on this application. The Department of Commerce must mark on
the application that the fee has been paid. The taxpayer must then attach the
marked application to the taxpayer’s tax return.
The Department of Commerce’s role in the application process ends on January
1, 2003. If a taxpayer that qualified for a tax credit before January 1, 2002, has
not submitted an application to the Department of Commerce by January 1,
2003, the taxpayer must provide the information required by the Department of
Revenue when filing a return that includes the credit and must pay any required
fee to the Department of Revenue. The taxpayer is not required to interact with
the Department of Commerce in claiming the credit.
Fee Paid to DOR. Subsection ( a1) was rewritten to require the fee that must be
paid by taxpayers before they can claim some of the Article 3A credits to be paid
to the Department of Revenue instead of the Department of Commerce. As
rewritten, the fee must be paid by the taxpayer when filing a tax return for the
taxable year in which the taxpayer engaged in the activity that qualifies the
taxpayer for an Article 3A credit. Under prior law, the fee was paid when an
application for certification was submitted to the Department of Commerce.
The fee is due at the time the return is due and the credit is not allowable until
the fee is paid. The Department of Revenue retains 75% of the fee proceeds
and credits the remaining fee proceeds to the Department of Commerce. The
fee amount and the allocation of the fee between the Departments of Revenue
and Commerce remain the same. The Department of Revenue, rather than the
Department of Commerce, is the agency that collects the fee.
Reports Made by DOR. Subsection ( b), which required the Department of
Commerce to issue an annual report on the Article 3A credits, was rewritten to
require the Department of Revenue, rather than the Department of Commerce,
to prepare and publish the report, to change the reporting date, to expand the
information required in the report, and to include the names of taxpayers
receiving the credits. With the elimination of the application to the Department of
Commerce, the Department of Commerce will not have data to prepare a report.
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As rewritten, the report is due by March 1 and covers the twelve- month period
ending the preceding December 31. Before the change, the report was due by
May 1 and covered the twelve- month period ending the preceding April 1. The
reporting change is effective for business activities occurring on or after January
1, 2002. The first report published by the Department of Revenue under the new
requirements is therefore due March 1, 2003, and will cover the twelve- month
period ending December 31, 2002.
The information required to be included in the report was expanded to include
the names of the taxpayers qualifying for and claiming the credits and specific
information about the credits. The specific additional information includes
information about tier areas for which credits are claimed, the worker training
credit, the research and development credit, and the new credit for substantial
investment in other property. The secrecy prohibition in G. S. 105- 259 is
amended to allow the disclosure of taxpayer names to meet the requirements of
subsection ( b).
( Effective for business activities occurring on or after January 1, 2002, and for
certain activities occurring before January 1, 2002, HB 338, s. 123, S. L. 01- 487
and SB 748, s. 8( a) and ( c), S. L. 01- 476. Note that Section 123 of Chapter 487
changed the original effective date of Section 8( a) of Chapter 476.)
G. S. 105- 129.7( b) – Reporting New Jobs and Conforming Changes: Three
subdivisions of subsection ( b) were amended to make one substantive and two
conforming changes. The substantive change, in subdivision ( b)( 1), eliminates
the requirement that taxpayers, when providing substantiating information about
new jobs created, identify whether the new employee lived in a development
zone when the employee took the job. Instead, if jobs for which a credit is taken
are located in a development zone, the taxpayer must identify the number of
those jobs that are filled by residents of the development zone.
Subdivisions ( b)( 3) and ( b)( 4) were amended to make two conforming changes.
The first change reflects the changes made to G. S. 105- 129.6. That statute was
rewritten to eliminate the requirement that a taxpayer obtain a certification from
the Department of Commerce to claim the Article 3A credits. As a result,
subdivision ( b)( 3) was amended to delete a reference to certification of an
investment amount.
The second conforming change reflects the enactment of the credit for a
substantial investment in other property, set out in G. S. 105- 129.12A.
Subdivisions ( b)( 3) and ( b)( 4) were amended to add references to this new
credit.
( Effective for taxable years beginning on or after January 1, 2002, SB 748, s. 9,
S. L. 01- 476.)
North Carolina Department of Revenue
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G. S. 105- 129.8( a)- Clarifying and Technical Changes: The first sentence of
this subsection was amended to make it clear that the relevant year is the
taxable year instead of the calendar year. Other provisions of this subsection
were amended to make stylistic changes that do not affect the meaning of the
statute.
( Effective September 14, 2001; SB 165, ss. 8 and 53, S. L. 01- 414.)
G. S. 105- 129.9( b) – Conforming Change: This subsection was amended to
conform with the changes made to G. S. 105- 129.6. That statute was rewritten to
eliminate the requirement that a taxpayer obtain a certification from the
Department of Commerce to claim the Article 3A credits. As a result, this
subsection was amended to delete the requirement that the taxpayer include
with the application information showing how the taxpayer calculated the eligible
investment amount.
( Effective for taxable years beginning on or after January 1, 2002, and applies to
machinery and equipment first placed in service on or after that date; SB 748, s.
10, S. L. 01- 476.)
G. S. 105- 129.9( c) – M& E Threshold Determined by Establishment: This
subsection was amended to apply the investment threshold for purposes of the
credit for investing in machinery and equipment to each establishment rather
than to each enterprise tier. Before the change, a taxpayer that had two or more
locations in an enterprise tier could add the amount invested at each location in
the tier in determining whether the taxpayer met the investment threshold. With
the change, the threshold applies separately to each establishment and the
taxpayer cannot add the amounts invested at each location. As a result, more
investment is required to qualify for the credits.
( Effective for taxable years beginning on or after January 1, 2002, and applies to
machinery and equipment first placed in service on or after that date; SB 748, s.
10, S. L. 01- 476.)
G. S. 105- 129.9A – Conforming Changes: Subsections ( c), ( d), and ( e) of this
section were amended to conform with the changes made to G. S. 105- 129.6.
That statute was rewritten to eliminate the requirement that a taxpayer obtain a
certification from the Department of Commerce to claim the Article 3A credits.
As a result, subsection ( c) of this section was amended to eliminate the duty of
the Secretary of Commerce to obtain an opinion from the Attorney General
before certifying an application in certain circumstances and to replace it with a
North Carolina Department of Revenue
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duty of the taxpayer to obtain a ruling from the Department of Revenue.
Subsections ( d) and ( e) were amended to delete references to certification.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 10,
S. L. 01- 476.)
G. S. 105- 129.12( c) – Expiration of Credit for Investing in Central Office or
Aircraft Facility Property: This subsection was amended to conform to the
change made to G. S. 105- 129.4 concerning the expiration of an installment of
the credit for investing in central office or aircraft facility property. Under G. S.
105- 129.4, as amended, the credit expires if the number of jobs at the office or
facility falls below the 40 required to qualify for the credit. Before this change,
the credit expired if the number of jobs at all the taxpayer’s central office or
aircraft facilities in the State dropped by 40 or more. The sentence contained in
this subsection about the expiration is deleted and G. S. 105- 129.4 governs the
expiration of the installments.
( Effective for taxable years beginning on or after January 1, 2001; SB 748, s. 12,
S. L. 01- 476.)
G. S. 105- 129.12A – New Credit for Substantial Investment in Other
Property: This section was enacted to benefit a specific taxpayer. It applies,
however, to any taxpayer that meets the requirements set in the statute.
The section provides a tax credit for substantial investment in other real property.
Subsection ( a) provides that a taxpayer is eligible for this credit if the taxpayer
begins to use real property located in a tier one or tier two area in an eligible
business during the tax year. The Department of Commerce must make a
written determination that the taxpayer will invest at least $ 10 million in real
property at the location within a three- year period and that the location will create
at least 200 new jobs within two years of the time the property is first used in the
eligible business.
The credit is equal to 30% of the eligible investment amount, which is the lesser
of ( i) the cost of the property and ( ii) the amount by which the cost of all of the
real property the taxpayer is using in this State in an eligible business on the last
day of the tax year exceeds the cost of all real property used by the taxpayer on
the last day of the base year. The base year is the year of the last three
preceding years in which the taxpayer had the most real property. In the case of
leased property, the cost of the property is equal to the taxpayer’s lease
payments over a seven- year period, plus any expenditures made by the taxpayer
to improve the property before it is used by the taxpayer if the expenditures are
not reimbursed or credited by the lessor.
The credit is taken in seven equal installments beginning in the year following the
year in which the property is first used in an eligible business. When part of the
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property is first used in an eligible business in one year and another part is first
used in an eligible business in a subsequent year, separate credits may be
claimed. The basis in the real property for which a credit is claimed must be
reduced by the amount of credit allowable.
Subsection ( b) provides a method of calculating the credit if only a portion of the
property is used in an eligible business. In this circumstance, the amount of
allowable credit is reduced by multiplying the allowable credit by the percentage
of the square footage of the property actually used in an eligible business.
Subsection ( c) provides for the expiration or reduction of the credit. If, in one of
the seven years in which the installments of the credit accrue, part or all of the
property is no longer used in the business or the number of employees at the
property is less than 200, the remaining installments expire.
Subsection ( d) provides that a taxpayer may not claim this credit if a credit for
investing in central office or aircraft facility property is taken for the same
property.
( Effective for taxable years beginning on or after January 1, 2002, and applies to
real property first used in an eligible business on or after that date; SB 748, s.
13, S. L. 01- 476.)
G. S. 105- 129.13 - Clarifying and Conforming Changes: Subsection ( c) was
amended to make it clear that the reference to the Secretary in this subsection
means the Secretary of Commerce rather than the Secretary of Revenue. The
Secretary of Commerce is responsible for collecting certain information from a
development zone agency before certifying an improvement project, not the
Secretary of Revenue.
Subsection ( e) was amended to conform with the changes made to G. S. 105-
129.6. That statute was rewritten to eliminate the requirement that a taxpayer
obtain a certification from the Department of Commerce to claim the Article 3A
credits. As a result, this subsection was amended to delete the reference to the
application that was formerly required under G. S. 105- 129.6.
( Clarifying change effective September 14, 2001; SB 165, ss. 9 and 53, S. L. 01-
414; conforming change effective for taxable years beginning on or after January
1, 2002; SB 748, s. 14, S. L. 01- 476.)
North Carolina Department of Revenue
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VI. BUSINESS AND ENERGY TAX CREDITS
Article 3B
G. S. 105- 129.15( 4a) – Pass- through Entity Defined: New subdivision ( 4a) was
added to define “ pass- through entity.” The term is applied in the credit for low-income
housing. The definition is the same as that established under Article 3D
for the credit for historic rehabilitation. A pass- through entity includes a limited
partnership, a general partnership, a joint venture, a Subchapter S Corporation,
and a limited liability company.
( Effective January 1, 2001; SB 181, ss. 1 and 4, S. L. 01- 431.)
G. S. 105- 129.16B - Special Allocation and Forfeiture of Credit for Low-
Income Housing: This section was amended to add a new allocation provision
concerning pass- through entities and to revise the provisions for forfeiture of the
credit. New subsection ( b1) allows a pass- through entity that qualifies for the
credit to allocate the credit among any of its owners in its discretion as long as
the amount of credit allocated to an owner does not exceed the owner’s adjusted
basis in the pass- through entity at the end of the taxable year in which the
federal credit is first claimed. An explanation of the allocation made under this
new subsection and the allocation that would have been required if this change
had not been enacted must be included with the tax returns filed by the pass-through
entity and the owners for each year in which the allocated credit is
claimed.
Subsection ( e) was rewritten and subsections ( f) and ( g) were added concerning
forfeiture of the credit. Subsection ( e) was amended to delete the provisions on
the effect of forfeiture and to stipulate that forfeiture applies to owners of a pass-through
entity in the same proportion that the credit was allocated.
Subsection ( f) was added to require an owner of a pass- through entity to forfeit a
portion of the credit for low- income housing if the owner disposes of more than
one- third of the owner’s interest in the pass- through entity within five years from
the date the federal credit is first claimed. The forfeiture amount is determined
by multiplying the amount of the credit by the percentage reduction in ownership
and then multiplying that product by an amount that equals the federal recapture
percentage found in section 50( a)( 1)( B) of the Internal Revenue Code. The
remaining allowable credit is allocated equally among the five years in which the
credit is claimed. The credit is not forfeited if the change in ownership is the
result of either the death of the owner or a merger, consolidation, or similar
transaction.
The provisions concerning the effect of a forfeiture that were deleted from
subsection ( e) are recodified in new subsection ( g). The provisions are moved
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Tax Administration Page 26 2001 Tax Law Changes
from subsection ( e) to this new subsection because they apply to forfeitures
under both subsection ( e) and new subsection ( f).
( Effective for taxable years beginning on or after January 1, 2001, and applies to
buildings placed in service on or after that date; SB 181, ss. 2 and 4, S. L. 01-
431.)
G. S. 105- 129.17( a) - Insurers Can Claim Low- Income Housing Credit: This
subsection was amended to permit the credit for low- income housing to be
claimed against the gross premiums tax levied in Article 8B. Prior to the
amendment, the credit was permitted only against the franchise or income tax
liability levied in Article 3 and Article 4, respectively. The purpose of this change
is to expand the pool of taxpayers that can benefit from the low- income housing
credit and thereby increase the market for these credits.
( Effective for taxable years beginning on or after January 1, 2001, and applies to
buildings placed in service on or after that date; SB 181, ss. 3 and 4, S. L. 01-
431.)
G. S. 105- 129.19 - Technical Change: This subsection was amended to
designate the Revenue Laws Study Committee rather than the Legislative
Research Commission as the entity to receive the Department of Revenue’s
report on Article 3B tax credits.
( Effective September 14, 2001; SB 165, s. 10, S. L. 01- 414.)
VII. HISTORIC REHABILITATION TAX CREDITS
Special Allocation Provision Extended: S. L. 1999- 389 included a special
provision in G. S. 105- 129.35( b) that allows a pass- through entity that qualifies for
the credit for rehabilitating income- producing historic property to allocate the
credit among any of its owners in its discretion as long as the amount of credit
allocated to an owner does not exceed the owner’s adjusted basis in the pass-through
entity at the end of the taxable year in which the rehabilitated structure is
placed in service. The special allocation provision was effective for taxable
years beginning on or after January 1, 1999, and was scheduled to expire
effective January 1, 2002, for property placed in service on or after that date.
The expiration date is now extended to January 1, 2004.
( Effective November 29, 2001, SB 748, s. 19, S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 27 2001 Tax Law Changes
VIII. CORPORATE INCOME TAX
G. S. 105- 130.4( a)( 4) – Excluded Corporation Clarifying Change: This
subdivision was amended to clarify that a corporation is an excluded corporation
if it receives more than 50% of its ordinary gross income from intangible
property. The amendment deletes the phrase “ investments in and/ or dealing in”
from the description of a corporation that falls under the category of an excluded
corporation.
The amendment was added as part of the royalty reporting option provisions.
Some intangible holding companies have argued to the Department that they are
not excluded corporations because they do not “ deal in” trademarks, in the sense
of regularly buying and selling trademarks as if the trademarks were securities on
an exchange. This argument distorts the meaning of the statutes and is contrary
to the Department’s longstanding application of the statute.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s.
1( c) and ( f), S. L. 01- 327.)
G. S. 105- 130.5 – Conforming Change: This section was amended to conform
to the new name of the former Office of State Budget, Planning, and
Management. The General Assembly eliminated the planning function from that
Office and renamed it the Office of State Budget and Management.
( Effective July 1, 2001; SB 1005, s. 12.2( b), S. L. 01- 424.)
G. S. 105- 130.5( a)( 7) – Dividends Received Add- Back Repealed: This statute
was repealed as part of the changes made to the corporate income tax laws to
conform North Carolina’s deduction for subsidiary dividends to federal law, net of
expenses. The repealed subdivision required taxpayers to add back to federal
taxable income, for the purpose of calculating North Carolina taxable income, the
amounts deducted from their federal taxable income under sections 241 through
247 of the Internal Revenue Code as dividends received.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s.
3( a), S. L. 01- 327.)
G. S. 105- 130.5( a)( 13) – FSC Add- Back Repealed: This subdivision was
repealed because it is obsolete by virtue of the federal repeal of the Foreign
Sales Corporation.
( Effective January 1, 2002; HB 232, s. 4( b), S. L. 01- 427.)
North Carolina Department of Revenue
Tax Administration Page 28 2001 Tax Law Changes
G. S. 105- 130.5( a)( 14) – New Royalty Payment Add- Back: This subdivision
was added as part of the royalty reporting option provisions. It requires the payer
of royalty payments to add the payments to its federal taxable income unless the
recipient of the royalty payments includes the royalty income from the payments
in the recipient’s income. New G. S. 105- 130.7A( c) sets out the options for
reporting royalty payments.
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the addition of
royalty payments to income under this subdivision.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
1( d) and ( f), S. L. 01- 327.)
G. S. 105- 130.5( b)( 3a) – Deduction for Foreign Source Dividends: This
subdivision was added as part of the changes made to the corporate income tax
laws to conform North Carolina’s deduction for subsidiary dividends to federal
law. The subdivision provides a deduction from federal taxable income for an
item that is included in federal gross income and is related to dividends received
but is not deductible under sections 243 through 247 of the Internal Revenue
Code. The item is dividends treated under section 862 of the Code as received
from sources outside the United States. The deduction is net of related
expenses.
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the changes made
to the laws concerning the deduction of dividends.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
3( b) and ( c), S. L. 01- 327 and HB 232, s. 10, S. L. 01- 427.)
G. S. 105- 130.5( b)( 3b) – Deduction For Items Related to Dividends: This
subdivision was added as part of the changes made to the corporate income tax
laws to conform North Carolina’s deduction for subsidiary dividends to federal
law. The subdivision provides a deduction from federal taxable income for two
items that are included in federal gross income and are related to dividends
received but are not deductible under sections 243 through 247 of the Internal
Revenue Code. One item is the amount treated as dividends received from a
foreign corporation under section 78 of the Code. The other item is a
shareholder’s pro rata share of the income of a foreign controlled corporation
under subpart F, section 951 of the Code. The deduction for both items is net of
related expenses.
North Carolina Department of Revenue
Tax Administration Page 29 2001 Tax Law Changes
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the changes made
to the laws concerning the deduction of dividends.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
3( b) and ( c), S. L. 01- 327 and HB 232, s. 10, S. L. 01- 427.)
G. S. 105- 130.5( b)( 20) – Deduction for Royalty Income: This subdivision was
added as part of the royalty reporting option provisions. It allows the recipient of
royalty income to deduct this income from federal taxable income, for the
purpose of computing North Carolina taxable income, if the corporation that
made the royalty payments adds the payments to its income under G. S. 105-
130.5( a)( 14).
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s.
1( e), S. L. 01- 327.)
G. S. 105- 130.7( b) – Subsidiary Dividend Deduction Repealed: This statute
was repealed as part of the changes made to the corporate income tax laws to
conform North Carolina’s deduction for subsidiary dividends to federal law, net of
expenses. Prior State law required taxpayers to add to their federal taxable
income the dividend deductions allowed under federal law and then allowed
taxpayers to deduct subsidiary dividends in accordance with this subdivision.
This subdivision allowed a corporation to deduct all dividends received from
corporations in which it owned more than 50% of the stock and, by application of
G. S. 105- 130.5( b)( 3) and ( c)( 3), did not require the deduction to be reduced by
related expenses.
As a result of the repeal of this subdivision and G. S. 105- 130.5( a)( 7), taxpayers
do not have to adjust their federal taxable income to add back their federal
dividends received deduction and then subtract from that adjusted amount the
North Carolina dividend deduction. The amount already deducted in their federal
taxable income will flow through to their North Carolina taxable income. The
amount deducted under federal law, however, must be reduced in accordance
with G. S. 105- 130.5( c)( 3) for expenses.
The change in the taxation of subsidiary dividends was one of the
recommendations of the North Carolina Efficiency and Loophole- Closing
Commission. That Commission, co- chaired by former Governors Jim
Holshouser and Bob Scott and former State Treasurer Harlan Boyles,
recommended that North Carolina’s law on subsidiary dividends be changed to
conform to the federal law. The Commission found that this change would have
no anti- competitive effects on businesses.
North Carolina Department of Revenue
Tax Administration Page 30 2001 Tax Law Changes
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the repeal of this
subdivision.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
3( a) and ( c), S. L. 01- 327.)
G. S. 105- 130.7A – Royalty Income: This new statute clarifies that royalties
from the use of trademarks in this State are income derived from doing business
in this State and are therefore subject to North Carolina income tax and sets out
new reporting options for royalty payments and income. Under the options,
royalty income from the use of a trademark in North Carolina may be reported in
either of two ways if the payer and the recipient are related entities. First, the
recipient of the payments can include the payments in its North Carolina income
and the company making the payments can deduct the payments from the
company’s North Carolina income. Second, the recipient of the payments can
exclude the payments from its North Carolina income and the company making
the payments can add the payments to the company’s North Carolina income.
The options in new G. S. 105- 130.7A are reporting options and not filing options.
A corporation that receives royalty payments for the use of trademarks in this
State is doing business in this State and must file an income tax return and a
franchise tax return. The reporting option for royalty payments for the use of
trademarks does not apply to interest income, income from patents, or any other
income reportable to North Carolina.
This statute is the result of a change recommended by the North Carolina
Efficiency and Loophole- Closing Commission and pursued by the General
Assembly. The Commission, co- chaired by former Governors Jim Holshouser
and Bob Scott and former State Treasurer Harlan Boyles, recommended that
North Carolina adopt the Ohio and Connecticut approach to royalty expenses
between related companies and disallow the deduction of these expenses. The
Ohio law was introduced in Senate Bill 1058 of the 2001 Session. The
provisions in Senate Bill 1058 were modified after consultation with businesses
to include the options set out in this statute and then incorporated in House Bill
1157.
This statute was enacted to address a problem with the current law identified by
the Department of Revenue and reported to the Efficiency and Loophole- Closing
Commission. The problem is the lack of compliance by intangible holding
companies with the requirement to file returns and pay taxes on their royalty
income derived from North Carolina. Section 1 of House Bill 1157 reflects this
concern. That section states that the “ General Assembly finds that most
corporations engaged in manufacturing and retailing activities in this State
comply with the State tax on income generated from using trademarks in those
North Carolina Department of Revenue
Tax Administration Page 31 2001 Tax Law Changes
activities” but that the taxpayers who do not comply create an unfair burden on
those who do.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s. 1,
S. L. 01- 327.)
G. S. 105- 130.41 – Ports Tax Credit Extended: The sunset on this credit, which
had expired for taxable years ending after February 28, 2001, was extended.
The credit now sunsets for taxable years beginning on or after January 1, 2003.
( Effective for taxable years beginning on or after March 2, 2000; HB 1388, ss. 1
and 2, S. L. 01- 517.)
IX. INDIVIDUAL INCOME TAX
G. S. 105- 134.2( a): Temporary Tax Rate Increase – This subdivision was
amended to add a new 8.25% temporary marginal income tax rate bracket above
the current top bracket of 7.75%. The rate applies to the 2001 tax year and
expires effective with the 2004 tax year.
The new 8.25% individual income tax rate bracket applies as follows: Married
individuals filing joint returns – 8.25% on taxable income over $ 200,000; Heads
of households – 8.25% on taxable income over $ 160,000; Unmarried individuals
other than surviving spouses and heads of households – 8.25% on taxable
income over $ 120,000; and Married individuals filing separately – 8.25% on
taxable income over $ 100,000.
Because the new bracket was enacted late in the tax year to which it first
applies, taxpayers subject to this new rate are protected from underpayment
penalties that could otherwise apply as a result of the increased liability.
Notwithstanding G. S. 105- 163.15, no addition to tax may be made for a taxable
year beginning on or after January 1, 2001, and before January 1, 2002, with
respect to an underpayment of individual income tax to the extent the
underpayment was created or increased by the new tax rate.
( Effective for taxable years beginning on or after January 1, 2001, and expires
for taxable years beginning on or after January 1, 2004; SB 1005, s. 34.18, S. L.
01- 424.)
North Carolina Department of Revenue
Tax Administration Page 32 2001 Tax Law Changes
G. S. 105- 134.6( b)( 16) – Conforming Change: This section was amended to
conform to the new name of the former Office of State Budget, Planning, and
Management. The General Assembly eliminated the planning function from that
Office and renamed it the Office of State Budget and Management.
( Effective July 1, 2001; SB 1005, s. 12.2( b), S. L. 01- 424.)
G. S. 105- 134.6( c) – Elimination of Standard Deduction Marriage Penalty:
This subsection was amended in two phases to eliminate the marriage penalty
with respect to the standard deduction. The term “ marriage penalty” refers to the
imposition of a higher income tax liability on a married couple than on two single
individuals due to two factors. One factor is the difference in the amounts
allowed single taxpayers and married taxpayers as a standard deduction. The
other factor is the difference in the thresholds for single taxpayers and married
taxpayers under the marginal income tax rates. The standard deduction for a
married couple is less than the standard deduction for a single taxpayer
multiplied by two. Similarly, the thresholds for the marginal tax rates for a
married couple occur at lower taxable income amounts than the thresholds for a
single taxpayer multiplied by two.
The General Assembly amended this subsection to end the marriage penalty
with respect to the standard deduction but did not change the marriage penalty
with respect to the marginal rate thresholds. The penalty attributable to the
thresholds remains and is perpetuated in the new 8.25% bracket explained
under G. S. 105- 134.2( a).
Under the changes made to this subsection, the standard deduction for a
married couple filing jointly and for a married individual filing separately
increases over a two- year period beginning with tax year 2002 to an amount that
eliminates the marriage penalty attributable to the standard deduction. Effective
with the 2002 tax year, the standard deduction for taxpayers whose filing status
is married filing jointly increases from $ 5,000 to $ 5,500. Effective with the 2003
tax year, the standard deduction for taxpayers whose filing status is married filing
jointly increases from $ 5,500 to $ 6,000. Similarly, effective with the 2002 tax
year, the standard deduction for married individuals whose filing status is married
filing separately increases from $ 2,500 to $ 2,750, and then increases from
$ 2,750 to $ 3,000 effective with the 2003 tax year. As a result, for the 2003 tax
year, the standard deduction for a married couple filing jointly will be twice the
standard deduction for a single taxpayer and the standard deduction for a
married taxpayer who files separately will be the same as the standard deduction
for a single taxpayer.
( Effective for taxable years beginning on or after January 1, 2002; SB 1005, s.
34.19( a) and ( b), S. L. 01- 424.)
North Carolina Department of Revenue
Tax Administration Page 33 2001 Tax Law Changes
G. S. 105- 151.12( f) – Credit for Certain Real Property Donations: This
subsection was enacted to create a temporary exception to the change made to
G. S. 105- 269.15( a) concerning the calculation of tax credits by partnerships.
The temporary exception applies for tax years 2002, 2003, and 2004.
Under the change made to G. S. 105- 269.15( a), a maximum dollar limit on a tax
credit applies to a partnership as a whole rather than to each of the individual
partners. This subsection preserves the application of the dollar limit on the
credit for real property donations at the individual partner level.
G. S. 105- 151.12( a) limits the credit for certain real property donations to
$ 250,000. If a partnership with four partners qualifies for a $ 1,000,000 tax credit,
each partner can claim a tax credit of $ 250,000. Without new subsection ( f),
each partner could claim a tax credit of only $ 62,500 ( one- fourth of the maximum
$ 250,000).
This exception was enacted at the request of the Department of Environment
and Natural Resources. That Department was concerned that the application of
the maximum credit at the partnership level rather than the partner level would
decrease the amount of property donated for land conservation purposes.
( Effective for taxable years beginning on or after January 1, 2002, and expires
for taxable years beginning on or after January 1, 2005; HB 146, ss. 2 and 3,
S. L. 01- 335.)
G. S. 105- 151.21( b)( 1) – Technical Change: This subdivision was amended to
make a technical change to the definition of farm machinery that applies to the
tax credit for property taxes paid on farm machinery. The cross- reference to the
definition of farm machinery was amended to reflect the 1999 recodification of
part of G. S. 105- 164.4( a)( 1d) as G. S. 105- 164.4A. Farm machinery subject to
the 1% sales tax rate is set out in G. S. 105- 164.4A instead of G. S. 105-
164.4( a)( 1d).
( Effective September 14, 2001; SB 165, ss. 11 and 53, S. L. 01- 414.)
G. S. 105- 151.22 – Ports Tax Credit Extended: The sunset on this credit, which
had expired for taxable years ending after February 28, 2001, was extended.
The credit now sunsets for taxable years beginning on or after January 1, 2003.
( Effective for taxable years beginning on or after March 2, 2000; HB 1388, ss. 1
and 2, S. L. 01- 517.)
G. S. 105- 151.24 – Two- step Increase in Credit for Children: This statute was
amended to make a two- step increase in the tax credit for a dependent child for
whom the taxpayer is allowed to claim a personal exemption. The first step is
effective for taxable years beginning on or after January 1, 2002, and increases
North Carolina Department of Revenue
Tax Administration Page 34 2001 Tax Law Changes
the credit from $ 60 to $ 75. The second step is effective for taxable years
beginning on or after January 1, 2003, and increases the credit from $ 75 to
$ 100. The adjusted gross income eligibility limits that apply to the credit remain
the same.
( Effective for taxable years beginning on or after January 1, 2002; SB 1005, s.
34.20 ( a) and ( b), S. L. 01- 424.)
G. S. 105- 151.27 – Repeal of Child Health Insurance Credit: The credit for
child health insurance was repealed effective for the 2001 tax year. This repeal
was recommended by the North Carolina Efficiency and Loophole- Closing
Commission, co- chaired by former Governors Jim Holshouser and Bob Scott and
former State Treasurer Harlan Boyles. The Commission recommended the
repeal as a means of providing more funds for North Carolina’s Health Choice
Program. The Commission believed that the State could provide health
insurance to more children by shifting the dollars that were being indirectly
appropriated by the tax credit to increased funding for the State’s Health Choice
Program. The tax credit was refundable and was complex.
( Effective for taxable years beginning on or after January 1, 2001; SB 1005, s.
34.21( a) and ( b), S. L. 01- 424.)
X. TAX CREDITS FOR QUALIFIED BUSINESS INVESTMENTS
G. S. 105- 163.013( g) – Technical Change: This subsection was amended to
delete a reference to the Legislative Research Commission and insert a
reference to the Revenue Laws Study Committee. This change reflects the
creation in 1999 of the Revenue Laws Study Committee as a permanent,
statutory committee. Before that change, the Revenue Laws Study Committee
operated under the umbrella of the Legislative Research Commission.
( Effective September 14, 2001; SB 165, ss. 12 and 53, S. L. 01- 414.)
North Carolina Department of Revenue
Tax Administration Page 35 2001 Tax Law Changes
XI. WITHHOLDING OF INCOME TAX
G. S. 105- 163.6 ( b) and ( c) – More Monthly Payments of Withholding Taxes:
Subsections ( b) and ( c) of this section were amended to move more taxpayers
from quarterly filing to monthly filing of withholding taxes. The purpose of the
changes is require more taxpayers to remit taxes more frequently, thereby
shifting the receipt of some tax revenue from the 2002- 03 fiscal year into the end
of the 2001- 02 fiscal year. When a taxpayer is changed from a quarterly filing
status to a monthly filing status, the State receives two months of withheld taxes
one fiscal year sooner.
Subsection ( b) was amended to require an employer who withholds an average
of less than $ 250 of State income taxes from wages each month to file a return
and pay the taxes on a quarterly basis. Subsection ( c) was amended to require
an employer who withholds an average of at least $ 250 but less than $ 2,000
from wages each month to file a return and pay the taxes on a monthly basis. .
Before these changes, the threshold for distinguishing quarterly filers from
monthly filers was $ 500 instead of $ 250. The change is expected to convert
about 70,000 quarterly taxpayers into monthly taxpayers.
( Effective January 1, 2002; HB 232, s. 5, S. L. 01- 427.)
XII. ESTIMATED INCOME TAX – CORPORATIONS
G. S. 105- 163.41( a) – Clarifying Change: This subsection was amended to
clarify that, in determining whether a corporation is subject to the penalty for
underpayment of estimated income tax, the amount of income tax imposed is the
net amount of income tax after reducing the tax by allowable tax credits.
( Effective September 14, 2001; SB 165, s. 13, S. L. 01- 414.)
North Carolina Department of Revenue
Tax Administration Page 36 2001 Tax Law Changes
XIII. SALES AND USE TAX
G. S. 105- 164.3 – Definition Changes: The language in this section preceding
the list of definitions was amended to make it conform to the standard statutory
language used to designate a list of definitions and numerous changes were
made to the definitions. Some definitions were revised, some were recodified,
some were added, and some were repealed.
Because of the number of new definitions added and repealed, Section 18( c) of
S. L. 01- 476 authorized the Codifier of Statutes to change the format of all the
definitions in this section to match the format of the new definitions and to
renumber the definitions to keep them in alphabetical order. Pursuant to this
instruction, the Codifier took two actions. The Codifier changed the format of the
definitions to match that of the new definitions and the existing definitions in G. S.
105- 164.3( 6b), ( 6d), ( 8), ( 8b), ( 16b), and ( 20). The new standard format sets out
the term to be defined, followed by a period, a dash, and then the definition. The
Codifier also renumbered all the definitions to eliminate letters after numbers.
The reformatting and renumbering affects all definitions in this section.
The changes to the definitions are as follows and become effective as noted
after each definition.
Business – ( 1). This definition was reformatted by the Codifier as part of the
changes to apply a standard format to G. S. 105- 164.3. No change was made to
the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Candy – ( 2)( New). This definition was added by the legislation enabling North
Carolina to become a member of the national Streamlined Sales Tax Project.
The definition matches the definition of candy adopted by that Project. The
definition sets out the ingredients that constitute candy; these ingredients do not
include flour.
Prior law did not include a definition of candy. A definition of candy was enacted
so candy can be identified and taxed differently from other types of food, if the
General Assembly chooses to do so. The 2001 General Assembly made no
changes in the taxation of candy. Candy that is purchased for home
consumption and would be exempt if purchased under the federal Food Stamp
Program remains exempt from State tax and the Mecklenburg ½ % Public Transit
Tax.
The legislation adding this definition designated it as ( 2a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 2) instead of ( 2a).
North Carolina Department of Revenue
Tax Administration Page 37 2001 Tax Law Changes
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Clothing – ( 3)( New). This definition was added to implement the new sales tax
holiday set out in new G. S. 105- 164.13C. During the holiday, clothing with a
sales price of $ 100 or less is exempt from State and local sales and use taxes.
The definition of clothing matches the definition of clothing adopted by the
national Streamlined Sales Tax Project. The term is defined as all human
wearing apparel suitable for general use. The Project definition contains an
exhaustive list of items that are included in the definition. The Department will
administer this definition in accordance with that list of items.
The legislation adding this definition designated it as ( 2b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 3) instead of ( 2b).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
Clothing accessories or equipment – ( 4)( New). This definition was added to
implement the new sales tax holiday set out in new G. S. 105- 164.13C. During
the holiday, clothing with a sales price of $ 100 or less is exempt from State and
local sales and use taxes but clothing accessories and equipment are subject to
tax. The definition of clothing accessories and equipment matches the definition
of the term adopted by the national Streamlined Sales Tax Project. The term is
defined as incidental items worn on the person or in conjunction with clothing.
The Project definition contains an exhaustive list of items that are included in the
definition. The Department will administer this definition in accordance with that
list of items.
The legislation adding this definition designated it as ( 2c). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 4) instead of ( 2c).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
Consumer – ( 5) ( Was 3). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3 and
to arrange all the definitions in alphabetical order without using letters to
designate any of the definitions. No change was made to the meaning of the
definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 38 2001 Tax Law Changes
Cost Price – Former ( 4). This definition was repealed. It is replaced by the
definition of “ purchase price” set out in subdivision ( 33) of this section. The new
term “ purchase price” has the same meaning as the prior term “ cost price.” Even
before the addition of the term “ purchase price,” the statutes used the terms
“ cost price” and “ purchase price” interchangeably. G. S. 105- 164.6( a)( 1), for
example, used the term “ cost price” and G. S. 105- 164.6( b) used the term
“ purchase price.”
( Effective January 1, 2002; SB 165, ss. 14 and 53, S. L. 01- 414.)
Delivery charges – ( 6)( New). This definition was added by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition matches the definition of delivery charges adopted by
that Project. As defined, the term means all charges imposed by a retailer for
preparation and delivery of personal property or services to a location designated
by the consumer.
As a result of the repeal of G. S. 105- 164.12, all transportation charges will be
taxable without regard to where shipment originates, where title passes, or how
the property is shipped. Under prior law, delivery charges were not taxable if title
passed to the purchaser at the point of origin.
The legislation adding this definition designated it as ( 4a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 6) instead of ( 4a).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Dietary supplement – ( 7)( New). This definition was added by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition is a simpler version of the definition adopted by that
Project but has the same meaning as the definition adopted by that Project. A
dietary supplement is a product that is intended to supplement the diet of
humans and is required to be labeled as a dietary supplement under federal law.
A definition of dietary supplement was enacted so these items can be identified
and taxed differently from other types of food, if the General Assembly chooses
to do so. The 2001 General Assembly made no changes in the taxation of
dietary supplements. These items are subject to State and local sales and use
taxes.
North Carolina Department of Revenue
Tax Administration Page 39 2001 Tax Law Changes
The legislation adding this definition designated it as ( 4b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 7) instead of ( 4b).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Direct- to- home satellite service – ( 8)( New). This definition was added as a result
of the levy of a 5% State sales and use tax under G. S. 105- 164.4( a)( 7) on direct-to-
home satellite services. The term is defined as “ programming transmitted or
broadcast by satellite directly to the subscribers’ premises without the use of
ground equipment or distribution equipment, except equipment at the
subscribers’ premises or the uplink process to the satellite.”
The legislation adding this definition designated it as ( 4a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 8) instead of ( 4a).
( Effective January 1, 2002; SB 1005, s. 34.17, S. L. 01- 424; SB 748, s. 18( c),
S. L. 01- 476.)
Engaged in business. – ( 9)( Was 5). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Food – ( 10)( New). This definition was added by the legislation enabling North
Carolina to become a member of the national Streamlined Sales Tax Project.
The definition matches the definition of food adopted by that Project, with one
technical difference. The Project definition of food states that the term does not
include alcoholic beverages. The Project definition of food excludes alcoholic
beverages so that the exemption many states have for food will not automatically
apply to alcoholic beverages as well.
The definition of food set out in this subdivision includes alcoholic beverages so
that the scope of the local prepared food taxes in North Carolina is not
inadvertently decreased. The local prepared food taxes in this State use the
definition of food set out in the State sales tax statutes as the starting point for
the levy of the tax. If alcoholic beverages are not included in the definition of
food, the local taxes must impose a tax on alcoholic beverages as well as on
prepared food to be able to tax alcoholic beverages. The relevant local acts
could be amended to do this, but the same result is achieved with fewer changes
to the local acts by including alcoholic beverages in the definition of food.
North Carolina Department of Revenue
Tax Administration Page 40 2001 Tax Law Changes
The definition of food is broad and is not tied to the federal Food Stamp
Program. Various categories of food, such as candy and dietary supplements,
are also defined to enable the General Assembly to make choices about what to
tax and what to exempt from tax.
The legislation adding this definition designated it as ( 5a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 10) instead of ( 5a).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; HB 748, s. 3,
S. L. 01- 489; SB 748, s. 18( c), S. L. 01- 476.)
Food sold through a vending machine – ( 11)( New). This definition was added by
the legislation enabling North Carolina to become a member of the national
Streamlined Sales Tax Project. The definition matches the definition of food sold
through a vending machine adopted by that Project. This definition was enacted
so that food sold through a vending machine can be identified and taxed
differently from other types of food, if the General Assembly chooses to do so.
The 2001 General Assembly made no changes in the taxation of food sold
through a vending machine. These items are subject to State and local sales
and use taxes based on 50% of their sales price.
The legislation adding this definition designated it as ( 5b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 11) instead of ( 5b).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Gross sales - ( 12)( Was 6). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Hub – ( 13)( Was 6b). This definition was renumbered by the Codifier as part of
the changes to apply a standard format to G. S. 105- 164.3. No change was
made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
In this State – ( 14)( Was 6c). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 41 2001 Tax Law Changes
Interstate air courier – ( 15)( Was 6d). This definition was renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Interstate passenger air carrier – ( 16)( Was 6e). This definition was renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Lease or rental – ( 17)( Was 7a). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Mail order sale – ( 18)( Was 7b). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Major recycling facility – ( 19)( Was 8). This definition was renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Manufactured home – ( 20)( Was 8a). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Mobile telecommunications service – ( 21)( New). This definition was added by
the legislation that consolidated the taxes on telecommunications into a 6%
State sales tax. The definition mirrors the definition of this term in the federal
Mobile Telecommunications Sourcing Act. As defined, mobile
telecommunications service is a radio communication service carried on between
North Carolina Department of Revenue
Tax Administration Page 42 2001 Tax Law Changes
mobile stations or receivers and land stations and by mobile stations
communicating among themselves.
The legislation adding this definition designated it as ( 8b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 21) instead of ( 8b).
( Effective January 1, 2002; HB 571, s. 13, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Moped – 22 ( Was 8b). This definition was renumbered by the Codifier as part of
the changes to apply a standard format to G. S. 105- 164.3. No change was
made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Motor vehicle – ( 23)( Was 8c). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Net taxable sales. – ( 24)( Was 9). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Nonresident retail or wholesale merchant – ( 25)( Was 10). This definition was
reformatted and renumbered by the Codifier as part of the changes to apply a
standard format to G. S. 105- 164.3. No change was made to the meaning of the
definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Person – ( 26)( Was 11). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Prepaid telephone calling arrangement – ( 27)( New). This definition was added
by the legislation that simplified the taxes on telecommunications. Its purpose is
to identify these arrangements so they can be taxed as tangible personal
North Carolina Department of Revenue
Tax Administration Page 43 2001 Tax Law Changes
property. The term is defined as a right that is paid for in advance, enables the
origination of phone calls by means of an access number, authorization code, or
similar means, and is sold in units or dollars whose number or dollar value
declines with use and is known on a continuous basis. A prepaid calling card is
an example of a prepaid telephone calling arrangement.
The legislation adding this definition designated it as ( 11a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 27) instead of ( 11a).
( Effective January 1, 2002; HB 571, s. 1, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Prepared food – ( 28)( Was 11b). This definition was rewritten by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The rewritten definition matches the definition of prepared food
adopted by that Project. The rewritten definition deletes the phrase “ and drink”
from the defined term but has the same meaning as the prior definition.
The legislation adding this definition designated it as ( 11a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 28).
( Effective January 1, 2002; SB 144, s. 2.3, S. L. 01- 347; SB 748, s. 18( c), S. L.
01- 476.)
Prescription drug – ( 29)( Was 11b). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Production company – ( 30)( Was 11c). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Protective equipment – ( 31)( New). This definition was added to implement the
new sales tax holiday set out in new G. S. 105- 164.13C. During the holiday,
certain clothing is exempt from State and local sales and use taxes but protective
equipment is subject to tax. The definition of protective equipment matches the
definition of the term adopted by the national Streamlined Sales Tax Project.
The Project definition contains an exhaustive list of items that are included in the
North Carolina Department of Revenue
Tax Administration Page 44 2001 Tax Law Changes
definition. The Department will administer this definition in accordance with that
list of items.
The legislation adding this definition designated it as ( 11d). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 31).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
Purchase – ( 32)( Was 12). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Purchase price – ( 33)( New). This definition was added by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition matches the definition of purchase price adopted by
that Project. The term has the same meaning as “ sales price” when applied to
an item subject to use tax.
The legislation adding this definition designated it as ( 12a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 33).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Retail sale or sale at retail – ( 34)( Was 13). This definition was rewritten by the
legislation enabling North Carolina to become a member of the national
Streamlined Sales Tax Project. The rewritten definition matches the definition of
retail sale or sale at retail adopted by that Project. The revised definition
expands the defined term from “ retail” to “ retail sale or sale at retail,” but makes
no substantive change in the law.
The legislation rewriting this definition kept the designation of the definition as
( 13). The Codifier of Statutes, however, renumbered all the definitions in G. S.
105- 164.3 to put them in their proper alphabetical order and changed the
designation of this definition to ( 34).
( Effective January 1, 2002; SB 144, ss. 2.4 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 45 2001 Tax Law Changes
Retailer – ( 35)( Was 14). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Sale or selling – ( 36)( Was 15). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Sales price – ( 37)( Was 16). This definition was rewritten by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition matches the definition of sales price adopted by that
Project. The revised definition lists items that are included in subpart a. and lists
items that are not included in subpart b. Four of the exclusions from tax that
were contained in this definition are now set out in G. S. 105- 164.13 as
exemptions. New subdivision ( 47) of G. S. 105- 164.13 exempts bottle deposits
from tax, new subdivision ( 48) of that section exempts deposits on certain
replacement parts from tax, new subdivision ( 49) exempts separately stated
installation charges from tax, and new subdivision ( 50) exempts from tax 50% of
the sales price of most items sold through a vending machine.
The only substantive change made as a result of rewriting the definition affects
cash discounts. Under the prior definition, cash discounts were included in the
sales price and tax was due on the sales price without regard to the discount.
Under the revised definition, cash discounts are not considered to be part of the
sales price.
The legislation rewriting this definition kept the designation of the definition as
( 16). The Codifier of Statutes, however, renumbered all the definitions in G. S.
105- 164.3 to put them in their proper alphabetical order and changed the
designation of this definition to ( 37).
( Effective January 1, 2002; SB 144, ss. 2.5 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Secretary – ( 38)( Was 16a). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 46 2001 Tax Law Changes
Service address – ( 39)( New). This definition was added by the legislation that
consolidated the taxes on telecommunications into a 6% State sales tax. The
definition mirrors the federal definition of this term. As defined, the service
address is the location of telecommunications equipment from which a customer
originates or receives telecommunications service. If the service provider cannot
determine the location of the equipment, such as with mobile
telecommunications, the location of the equipment may be determined based on
the telephone number of the customer, the mailing address, or the street
address.
The legislation adding this definition designated it as ( 16b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 39).
( Effective January 1, 2002; HB 571, s. 1, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Soft drink – ( 40)( New). This definition was added by the legislation enabling
North Carolina to become a member of the national Streamlined Sales Tax
Project. The definition matches the definition of soft drink adopted by that
Project. The definition differs from the definition of soft drink that applied in the
repealed soft drink excise tax previously imposed under Article 2B of Chapter
105.
This definition was enacted so that soft drinks can be identified and taxed
differently from other types of food, if the General Assembly chooses to do so.
The 2001 General Assembly made no changes in the taxation of soft drinks.
The legislation adding this definition designated it as ( 16b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 40).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Special mobile equipment – ( 41)( Was 16b). Two acts passed in the 2001
Session affected the number and format of this definition but not its substance.
Chapter 347 changed the designation of this section from ( 16b) to ( 16c) to
accommodate the addition by that act of other definitions to G. S. 105- 164.3.
Chapter 476 gave the Codifier of the Statutes the authority to renumber and
reformat all the definitions in G. S. 105- 164.3. The Codifier exercised this
authority, changed the format of the definition to the new standard format, and
changed the designation of this definition to ( 41).
North Carolina Department of Revenue
Tax Administration Page 47 2001 Tax Law Changes
( Effective January 1, 2002; SB 144, ss. 2.7 and 3.2, S. L. 01- 347; SB 748, s. 18,
S. L. 01- 476.)
Sport or recreational equipment – ( 42)( New). This definition was added to
implement the new sales tax holiday set out in new G. S. 105- 164.13C. During
the holiday, certain clothing is exempt from State and local sales and use taxes
but sport or recreational equipment is subject to tax. The definition of sport or
recreational equipment matches the definition of the term adopted by the
national Streamlined Sales Tax Project. The Project definition contains an
exhaustive list of items that are included in the definition. The Department will
administer this definition in accordance with that list of items.
The legislation adding this definition designated it as ( 16e), but gave the Codifier
of the Statutes the authority to renumber all the definitions in G. S. 105- 164.3.
The Codifier exercised this authority, renumbered all the definitions in G. S. 105-
164.3 to put them in their proper alphabetical order, and changed the
designation of this definition to ( 42).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
State agency – ( 43)( Was 16c). Two acts passed in the 2001 Session affected
the number of this definition but not its substance. Chapter 347 changed the
designation of this section from ( 16c) to ( 16d) to accommodate the addition by
that act of other definitions to G. S. 105- 164.3. Chapter 476 gave the Codifier of
the Statutes the authority to reformat and renumber all the definitions in G. S.
105- 164.3. The Codifier exercised this authority, changed the format of the
definition to the new standard format, and changed the designation of this
definition to ( 43).
( Effective January 1, 2002; SB 144, ss. 2.7 and 3.2, S. L. 01- 347; SB 748, s. 18,
S. L. 01- 476.)
Storage – ( 44)( Was 17). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Storage and use; exclusion – ( 45)( Was 19). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 48 2001 Tax Law Changes
Tangible personal property – ( 46)( Was 20). This definition was renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Taxpayer – ( 47)( Was 20). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Telecommunications service – ( 48)( New). This definition was added by the
legislation that consolidated the taxes on telecommunications into a 6% State
sales tax. The definition mirrors the federal definition of this term. As defined,
telecommunications service is the transmission, conveyance, or routing of voice,
data, audio, video, or any other information or signals to a point, or between or
among points, by or through any electronic, radio, satellite, optical, microwave, or
other medium regardless of the protocol used for the transmission, conveyance,
or routing.
The legislation adding this definition designated it as ( 21a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 48).
( Effective January 1, 2002; HB 571, s. 1, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Use – ( 49)( Was 18). This definition was reformatted, renumbered, and
amended. The amendment adds “ distribution” to the list of activities that
constitute “ use” for sales and use tax purposes. This addition is a change from
prior law. The change brings North Carolina law in line with the United States
Supreme Court decision in the case of D. H. Holmes. Under the rewritten
definition, use tax is due when an in- state retailer contracts with an out- of- state
printer to print catalogues or other material and mail the material directly from the
printer’s place of business to customers of the retailer in North Carolina.
Chapter 476 of the 2001 Session Laws gave the Codifier of the Statutes the
authority to reformat and renumber all the definitions in G. S. 105- 164.3. The
Codifier exercised this authority, changed the format of the definition to the new
standard format, and changed the designation of this definition to ( 49) so that it
is in the proper alphabetical order.
( Effective January 1, 2002; SB 144, ss. 2.6 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 49 2001 Tax Law Changes
Use tax – ( 50)( Was 22). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Utility – ( Former 25). This definition was repealed because it is no longer used.
The statutes that applied this term were rewritten in the 2

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North Carolina
2001 Tax Law Changes
North Carolina Department of Revenue
Tax Administration
North Carolina Department of Revenue
Tax Administration Page 1 2001 Tax Law Changes
PREFACE
This document is designed for use by personnel in the North Carolina
Department of Revenue. It is available to those outside the Department as a
resource document. It gives a brief summary of the following tax law changes:
( 1) Changes made by prior General Assemblies that take effect for tax
year 2001. Each change enacted by a prior General Assembly is also
discussed in the Department’s Tax Law Change document for the year
the change was enacted.
( 2) Changes made by the 2001 General Assembly, regardless of when
they take effect.
The changes are listed by type of tax. The order of the tax types is their order in
the General Statutes, except for local sales and use tax changes. The local
sales and use tax changes follow the State sales and use tax changes, and both
changes are grouped under the heading “ Sales and Use Tax.” Within a tax type,
the changes are listed in numerical order. The document does not include law
changes that affect the Department of Revenue but do not affect the tax laws.
For further information on a tax law change, refer to the legislation that made the
change. Administrative rules, bulletins, directives, and other instructions issued
by the Department, as well as opinions issued by the Attorney General’s Office,
may provide further information on the application of a tax law change.
The General Assembly began its 2001 session on January 24, 2001, and
adjourned on December 6, 2001. Under Article II, Section 22( 7) of the North
Carolina Constitution, the Governor then had 30 days to sign or veto the bills
enacted during the final days of the session. The Governor signed the last of the
tax bills on January 4, 2002.
North Carolina Department of Revenue
Tax Administration Page 2 2001 Tax Law Changes
Table of Contents
Type of Tax Page
I. Estate Tax........................................................................................... 3
II. Privilege Tax ....................................................................................... 3
III. Alcoholic Beverage License and Excise Taxes................................... 4
IV. Corporate Franchise Tax .................................................................... 5
V. Tax Incentives for New and Expanding Businesses ........................... 8
VI. Business and Energy Tax Credits....................................................... 25
VII. Historic Rehabilitation Tax Credits ...................................................... 26
VIII. Corporate Income Tax ........................................................................ 27
IX. Individual Income Tax ......................................................................... 31
X. Tax Credits for Qualified Business Investments ................................. 34
XI. Withholding of Income Tax ................................................................. 35
XII. Estimated Income Tax - Corporations................................................. 35
XIII. Sales and Use Tax.............................................................................. 36
XIV. Highway Use Tax ................................................................................ 76
XV. Scrap Tire Disposal Tax...................................................................... 79
XVI. White Goods Disposal Tax ................................................................. 80
XVII. Dry- Cleaning Solvent Tax ................................................................... 81
XVIII. Piped Natural Gas Excise Tax ........................................................... 81
XIX. Mill Machinery Tax .............................................................................. 82
XX. Gift Tax .............................................................................................. 83
XXI. Insurance Premiums Tax .................................................................... 83
XXII. Excise Tax on Conveyances............................................................... 85
XXIII. General Administration ....................................................................... 85
XXIV. Property Tax ....................................................................................... 90
XXV. Motor Fuels Tax .................................................................................. 98
XXVI. Debt Set- Off ........................................................................................ 100
XXVII. Studies ................................................................................................ 100
North Carolina Department of Revenue
Tax Administration Page 3 2001 Tax Law Changes
I. ESTATE TAX
No State law changes: The federal Economic Growth and Tax Relief
Reconciliation Act of 2001, signed into law on June 7, 2001, makes changes to
the federal estate and gift tax laws. These changes do not apply to the North
Carolina estate tax law because of the definition of Code in G. S. 105- 32.1( 1) and
G. S. 105- 228.90( 1a). The term “ Code” as defined in those statutes means the
Internal Revenue Code as enacted as of January 1, 2001. The June 7, 2001
federal changes were enacted after January 1, 2001, and therefore do not apply
to North Carolina law. In order for the June 7, 2001 federal changes to apply to
North Carolina, the General Assembly must enact legislation changing the
reference date of the Code. In the absence of this legislation, the Department
will not follow the federal changes.
II. PRIVILEGE TAX
G. S. 105- 111 - Repeal: This statute was repealed because it is unnecessary.
Its provisions either repeat other statutes or are obsolete. Subsection ( a) of the
section is unnecessary because G. S. 105- 104 describes the Secretary’s role in
administering the privilege taxes. Subsection ( b) describes an obsolete process
for issuing privilege licenses. Privilege licenses are generated by the
Department’s integrated tax system rather than through the use of blank
certificates. Subsection ( c) describes an obsolete procedure for issuing
duplicate privilege licenses. The Department issues a duplicate by reprinting the
notice to the taxpayer that contains the privilege license and will continue to
follow this procedure.
( Effective September 14, 2001; SB 165, ss. 2 and 53, S. L. 01- 414.)
G. S. 105- 113.21( a) – Technical Change: This subsection was amended to
make it clear that in order for a distributor of cigarettes to receive a four percent
discount as reimbursement for expenses incurred for preparing records and
furnishing a bond, the taxpayer must pay the tax on time. Before this change,
the law did not specifically require the payment to be timely to qualify for the
discount. The change made to this subsection parallels the changes made to
other statutes that allow payment discounts. Every statute that allows a payment
discount was changed to make it clear that the discount applies only if the tax is
timely paid.
( Effective September 14, 2001; SB 165, ss. 3 and 53, S. L. 01- 414.)
North Carolina Department of Revenue
Tax Administration Page 4 2001 Tax Law Changes
G. S. 105- 113.39 – Technical Change: This section was amended to make it
clear that in order for a distributor of other tobacco products to receive a four
percent discount as reimbursement for expenses incurred for preparing records
and furnishing a bond, the taxpayer must pay the tax on time. Before this
change, the law did not specifically require the payment to be timely to qualify for
the discount. The change made to this section parallels the changes made to
other statutes that allow payment discounts. Every statute that allows a payment
discount was changed to make it clear that the discount applies only if the tax is
timely paid.
( Effective September 14, 2001; SB 165, ss. 4 and 53, S. L. 01- 414.)
III. ALCOHOLIC BEVERAGE LICENSE AND EXCISE TAXES
G. S. 105- 113.80( c) – Rate Reduction and Conforming Change: This
subsection was amended in two ways. First, the excise tax rate on liquor sold in
ABC stores was reduced from 28% to 25%, effective February 1, 2002. The
excise tax was reduced because of the enactment of G. S. 105- 164.4( a)( 7),
which levies a 6% State sales tax on spirituous liquor effective December 1,
2001. Second, the language exempting spirituous liquor from sales and use
taxes was deleted. The deletion of this language is a conforming change
necessitated by the levy of the new sales tax on liquor.
( Excise tax reduction effective February 1, 2002, and conforming change
effective December 1, 2001; SB 1005, ss. 34.23( c), ( d), and ( e), S. L. 01- 424.)
G. S. 105- 113.81A - Increase in Wine Tax Proceeds Earmarked for Grape
Growers Council: This section was amended to increase the amount of wine
tax proceeds earmarked for the Grape Growers Council. Under prior law, the
Department of Revenue credited to the Department of Agriculture and Consumer
Services on a quarterly basis 94% of the net proceeds of the excise tax collected
on unfortified wine and 95% of the net proceeds of the excise tax collected on
fortified wine bottled in North Carolina during the previous quarter. The amount
credited could not exceed $ 175,000 annually. As amended, the amount credited
is 100% of the net proceeds of both unfortified and fortified wine bottled in North
Carolina and the annual maximum is $ 350,000.
( Effective October 1, 2001, for distributions made on or after that date; SB 970,
s. 1, S. L. 01- 475.)
G. S. 105- 113.85 – Technical Change: This subsection was amended to make
two technical changes. The first change makes it clear that in order for a
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wholesaler or importer of malt beverages or wine to receive a four percent
discount as reimbursement for expenses incurred for preparing records and
furnishing a bond, the taxpayer must pay the tax on time. Before this change,
the law did not specifically require the payment to be timely to qualify for the
discount. The change made to this section parallels the changes made to other
statutes that allow payment discounts. Every statute that allows a payment
discount was changed to make it clear that the discount applies only if the tax is
timely paid. The second technical change makes the wording of the statute
gender- neutral.
( Effective September 14, 2001; SB 165, ss. 5 and 53, S. L. 01- 414.)
IV. CORPORATE FRANCHISE TAX
G. S. 105- 114( c)- Corporate Members of LLCs: This new subsection requires a
corporation that is a member of a limited liability company ( LLC) and is entitled to
receive at least 70% of the LLC’s assets upon dissolution to include the LLC’s
assets in the corporation’s franchise tax base. The member corporation’s
investment in the LLC is excludible from the computation. The new subsection
also provides that a taxpayer that underpays the franchise tax due under this
subsection because of fraud with intent to evade tax is guilty of a Class H felony.
This criminal sanction would apply in the absence of this specific language by
operation of G. S. 105- 236( 7).
This subsection was enacted out of concern for the erosion of the franchise tax
base. The legislation enacting new subsection ( c) states that some taxpayers
“ take advantage of an unintended loophole in the law and avoid franchise tax by
transferring their assets to a controlled limited liability company.” The potential
erosion stems from the exemption of LLCs from the franchise tax and the ability
of corporations to transfer assets to single- member LLCs of which the
corporations are the single members. This can reduce the corporation’s
franchise tax liability under the calculation based on investment in tangible
property.
The changes made by this subsection are a modification of a recommendation of
the North Carolina Efficiency and Loophole- Closing Commission. That
Commission, co- chaired by former Governors Jim Holshouser and Bob Scott and
former State Treasurer Harlan Boyles, recommended that all LLCs be subject to
the franchise tax and that the annual report fee for LLCs be reduced from $ 200
to $ 20.
( Effective January 1, 2002, and applies to taxes due on or after that date; HB
1157, s. 2, S. L. 01- 327.)
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G. S. 105- 116- Accelerated Payments by Electric Companies and Technical
Changes: Subsections ( b) and ( d) of this section were amended to revise the
payment schedule for electric power companies and to make technical changes.
The purpose of the revised payment schedule is to require more frequent
payments, thereby shifting the receipt of some tax revenue from the 2002- 03
fiscal year into the end of the 2001- 02 fiscal year.
Amended subsection ( b) requires electric power companies to pay their gross
receipts taxes on electricity in accordance with the same schedule by which they
pay sales and use taxes on electricity. G. S. 105- 164.16 sets out the payment
schedule for sales and use taxes. It requires a taxpayer that consistently remits
at least $ 10,000 a month in sales and use taxes to pay the taxes twice a month.
By application of G. S. 105- 241( b)( 2), these semimonthly payments must be
made by electronic funds transfer. The sales tax law requires a taxpayer who
remits between $ 100 and $ 10,000 a month to pay on a monthly basis, and
requires all other taxpayers to pay on a quarterly basis.
Before this change, all electric power companies paid their gross receipts
franchise taxes on a monthly basis and filed a quarterly return. With the
changes, electric power companies will pay on a semimonthly, monthly, or
quarterly basis depending on their payment schedule for sales and use taxes
and will continue to file a return on a quarterly basis. Because electric power
companies typically remit large amounts of sales tax on electricity, they will likely
pay their sales tax on a semimonthly basis. As a result, they will be required to
pay their gross receipts franchise tax on a semimonthly basis as well. They will
continue to file a franchise return on the same quarterly schedule, however,
because the due date of the quarterly return has not changed. The return is due
by the last day of the month following the end of the quarter.
The penalty for underpayments has been revised to accommodate the new
semimonthly payment periods. Before this change, an electric power company
was not subject to interest and penalty on an underpayment for a monthly
payment period if it paid at least 95% of what was due and paid the remainder
when filing the quarterly return. As revised, an electric power company is not
subject to interest and penalty on an underpayment for a semimonthly or
monthly payment period if it timely pays at least ninety- five percent of the amount
due for each period and includes the underpayment with next quarterly return.
The changes made to the payment schedule for electric power companies do not
affect water and sewerage companies. These companies will continue to file
and pay on a quarterly basis.
In rewriting this section to revise the payment schedule, several technical
changes were made. First, references in the section to a quarterly “ report” were
changed to a quarterly “ return.” This change is part of the continuing effort to
refer to all tax forms submitted by taxpayers as tax returns rather than tax
reports. Second, the sentence requiring taxpayers to report on an accrual basis
was moved from the paragraph in subsection ( b) following the numbered
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subdivisions to the paragraph preceding the numbered subdivisions. Third, the
language requiring the Secretary to determine a practical method of allocating
gross receipts to a city if the taxpayer fails to do so was removed from
subsection ( b) and inserted in subsection ( d).
( Effective January 1, 2002; HB 232, ss. 6( c), ( d), and ( j), S. L. 01- 427.)
G. S. 105- 116.1- Conforming Changes to Gross Receipts Tax Distribution to
Cities: This section was amended to reflect the repeal of the gross receipts
franchise tax on telephone companies, formerly set out in G. S. 105- 120.
Effective January 1, 2002, the telephone franchise tax is repealed and replaced
with an increased sales tax on telecommunications service.
This section was amended to delete references to telephone companies and to
G. S. 105- 120, so that the distribution under this section applies only to receipts
from electric power companies. In addition, the section was amended in various
places to insert language clarifying that the computation and allocation of the
hold- harmless adjustment for the city distribution includes only receipts from
electric power companies and natural gas companies.
As a result, the hold- back amount for a city will be adjusted to delete the portion
attributable to telephone receipts and the adjusted amount will be taken only
from receipts from electric power companies and piped natural gas companies.
New G. S. 105- 164.44F addresses the freeze deduction for receipts from the
repealed franchise tax on local telecommunications service.
( Effective January 1, 2002, and applies to taxable services reflected on bills on
or after that date; HB 571, s. 11, S. L. 01- 430.)
G. S. 105- 120- Telephone Tax Amended and then Repealed: The General
Assembly amended this section to make the same changes in the payment
schedule for telephone companies that it made for electric power companies in
G. S. 105- 116. It then repealed this section as part of the telecommunications
reform legislation that consolidates all the taxes on telecommunications services
into a single State sales tax at the rate of 6%. As a result, the amendments
never went into effect. New G. S. 105- 164.4B sets out the consolidated
telecommunications tax.
( Amendments effective January 1, 2002; HB 232, s. 6( e), S. L. 01- 427; repeal
effective January 1, 2002; HB 571, s. 12, S. L. 01- 430, and HB 338, ss. 118 and
126, S. L. 01- 487.)
G. S. 105- 122( d1)- Technical and Clarifying Changes: This subsection was
amended to delete an obsolete reference to Part 5 of Article 4 of Chapter 105 of
the General Statutes. That Part sets out the tax credits for qualified business
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investments. The reference to that Part is obsolete because the tax credits for
qualified business investments can be claimed only against individual income
tax. A C corporation is therefore not eligible for the tax credits for qualified
business investments. An S corporation, as a pass- through entity, can qualify for
the credits but the credits must be claimed by the S corporation shareholders
against individual income tax.
The subsection was also amended to clarify the tax credit for one- half the piped
natural gas excise tax. The amendment makes it clear that this credit is subject
to the general limitation that a tax credit cannot exceed the amount of tax and is
therefore not refundable.
( Effective September 28, 2001; HB 232, s. 12, S. L. 01- 427.)
V. TAX INCENTIVES FOR NEW AND EXPANDING
BUSINESSES
Article 3A
G. S. 105- 129.2 – Clarifying, Substantive, and Technical Changes: This
section was amended to clarify the “ primary business” requirement for eligibility
for the Article 3A credits and then to make exceptions to that requirement for tax
years beginning in 2001 or later.
Primary Business Clarification. - This amendment makes it clear that a taxpayer
is eligible for most of the tax credits in Article 3A only if the primary business of
the taxpayer is an eligible business. There had been some confusion in the past
as to whether a taxpayer had to be both primarily engaged in a qualifying
business and performing the activity qualifying for a credit in that business to be
eligible for a credit. Some taxpayers believed that the credits were site- specific,
meaning that their primary business did not matter as long as they were in a
qualifying business at the site of the activity.
The amendment makes it clear that for tax years prior to 2001, a taxpayer had to
be both primarily engaged in a qualifying business and be conducting that
business at the site of the activity to be eligible for any of the Article 3A credits
except for the credit for investing in central office or aircraft facility property or the
credit for contributing to a development zone project. This clarification is
consistent with the Department of Revenue’s long- standing interpretation and is
not considered a change to current law. The legislation sets out a finding by the
General Assembly that the amendments concerning primary business “ clarify the
intent of the existing law and do not represent a change in the law.”
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Substantive Changes. - The substantive amendments to this section are
effective for tax years 2001 and later. They remove the requirements regarding
primary business from five of the definitions, add three new definitions, and
amend three of the existing definitions. The amendments remove the primary
business requirement from the definitions of “ air courier services,” “ data
processing,” “ electronic mail order house,” “ manufacturing,” “ warehousing,” and
“ wholesale trade.” These requirements are removed from this section because
they are incorporated in G. S. 105- 129.4( a) with some modifications. See the
discussion of G. S. 105- 129.4( a) for an explanation of the changes to the primary
business requirement.
One of the two new definitions is for “ computer services” and one of the
amended definitions is the term “ data processing.” The definition of the term
“ computer services” includes four of the five NAICS industry groups previously
included in the definition of “ data processing.” The new term “ computer services”
includes computer systems design and related services, software publishing,
software reproducing, and on- line information services.
The amended definition of “ data processing” is not tied to NAICS and consists of
six new types of businesses. The six are data entry and preparation; database
creation, conversion, and management; data capture and imaging; rental of
computer processing time; conversion of data storage media; and conversion of
data file format. The term does not include payroll services, text processing,
desktop publishing, or financial transaction processing.
A new limitation applies to both computer services and data processing. For a
taxpayer in either of these industries to qualify for an Article 3A credit, the
taxpayer must provide the services primarily to persons who are not related
entities.
The other new definitions are for “ establishment” and “ related entity.” As
defined, the term “ establishment” has the same meaning as in NAICS. The term
“ related entity” was added as a result of the new limitation on eligibility for
businesses engaged in computer services or data processing. As defined, the
term “ related entity” has the same meaning as in new G. S. 105- 130.7( a).
The other amended definitions are “ customer service center” and “ NAICS.” The
term “ customer service center” was amended to delete the reference to an
auxiliary subdivision and replace it with a reference to the new term
establishment. This change was made because the term “ auxiliary subdivision”
was not defined and was not clear.
The amendment to the definition of NAICS pegs the NAICS to a certain date.
The date set is December 31, 1997. This change parallels the treatment of the
Internal Revenue Code, which is tied to a certain date set in G. S. 105-
228.90( b)( 1a). The change was made to avoid any issue of an impermissible
delegation of the taxing power.
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Technical Changes. – The technical changes renumber the subdivisions in the
section. The renumbering affects the definition of “ customer service center” and
all subsequent definitions in the section. Before the changes, the definition of
customer service center was designated as subdivision ( 3a). After the changes,
this definition is designated as subdivision ( 5). Subsequent definitions are
similarly affected.
( Clarifying changes effective November 29, 2001, SB 748, ss. 1( a) and ( c), S. L.
01- 476; substantive and technical changes effective for taxable years beginning
on or after January 1, 2001, SB 748, ss. 1( b) and ( c), S. L. 01- 476.)
G. S. 105- 129.2A – Conforming Changes and Change in Frequency of
Report: Subsections ( a), ( c), and ( d) of this section were amended to make
slight changes. Subsection ( a) was amended to provide that Article 3A of
Chapter 105 expires for business activities that occur on or after January 1,
2006. This change conforms with the change to G. S. 105- 129.6 that eliminates
the requirement that a taxpayer submit an application to the Department of
Commerce to claim the credits in Article 3A. The expiration date for Article 3A
remains the same.
Subsection ( c) was amended to update the economic recruitment data used by
the Department of Commerce in conducting its impact study of the effectiveness
of the tax credits. Before the amendment, the subsection required the use of
data ending in 2000. The change deletes the date “ 2000” and requires the use
of the most recent data.
Subsection ( d) was amended to require the Department of Commerce to conduct
an equity study and an impact study of the tax credits every two years. The
reports are due by April 1 of odd- numbered years. Before the change, the
subsection required the two reports to be submitted once on April 1, 2001.
( Effective November 29, 2001, SB 748, s. 2, S. L. 01- 476.)
G. S. 105- 129.3 – Information, Population, and Industrial Park Changes:
Subsections ( b), ( d), and ( e) of this section were amended. Subsection ( b) was
amended to require the Department of Commerce to publish the enterprise tier
designations of the counties rather than provide the information to the Secretary
of Revenue. This information was already available on the Department of
Commerce’s website at ww. nccommerce. com/ finance/ tiers/, so the change is a
technical change rather than a substantive change.
Subsection ( d) was amended to allow more flexibility in creating two- county
industrial parks. It was enacted for the benefit of Craven County and Jones
County. Any other county park that meets the revised description will benefit as
well. Under the law, when an industrial park is located in two counties, the park
has the lower tier designation of the two counties in which it is located if certain
conditions are met. Before this change, one of the conditions was a requirement
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that the lower- tiered county contribute at least one- half of the cost of developing
the park. Under the amendment, the lower- tiered county must contribute the
lesser of one- half the cost of developing the park or the proportion of the cost of
developing the park that is equal to the proportion of the park located in that
county. At least one- third of the park must be located in the county with the
lower tier designation.
Subsection ( e) was amended to benefit more counties. Under that subsection,
counties receive lower tier designations than they otherwise would if they meet
certain conditions. Under subdivision ( 1) of that subsection, counties with
populations that meet specified thresholds qualify as Tier One. One of the
specified thresholds is total population. This threshold was increased from
10,000 to 12,000. This change enables Alleghany County and Jones County to
qualify as Tier One counties.
Under subdivision ( 3) of subsection ( e), counties that would otherwise receive
designations as Tier Five or Tier Four counties can qualify as Tier Three
counties if their population does not exceed a specified threshold. This threshold
was increased from 25,000 to 35,000. This change enables Alexander, Dare,
Davie, Macon, and Transylvania Counties to qualify as Tier Three Counties.
( Information and population changes in subsections ( b) and ( e) effective
November 29, 2001, SB 748, s. 3, S. L. 01- 476; industrial park change in
subsection ( d) effective for taxable years beginning on or after January 1, 2001;
SB 538, S. L. 01- 94.)
G. S. 105- 129.3A – Publication of Development Zones and Technical
Change: This section defines development zones and authorizes the
Department of Commerce to designate areas as development zones.
Subsection ( b) was amended to require the Department of Commerce to publish
annually a list of all development zones with a description of their boundaries.
Subsection ( c) was amended to correct an incorrect cross- reference to the wage
standard. That standard is codified under G. S. 105- 129.4, not under G. S. 105-
129.3( b).
( Publication change effective November 29, 2001, SB 748, s. 4, S. L. 01- 476;
technical change effective September 14, 2001; SB 165, ss. 6 and 53, S. L. 01-
414.)
G. S. 105- 129.4( a) – Types of Eligible Businesses: This subsection was
rewritten to become the primary law for determining whether a taxpayer is in an
eligible business for purposes of the Article 3A credits. The eligible businesses
are divided into six categories. In some cases, the primary business requirement
remains the same; in other cases, the primary business requirement is relaxed.
The six categories and their requirements are as follows:
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( 1) Central office or aircraft facility. To be an eligible business, the
taxpayer must operate a central office or aircraft facility that creates at
least 40 new jobs and the jobs, investment, and activity with respect to
which a credit is claimed must be used in that office or facility. These
are the same requirements as under prior law.
( 2) Single business. This category consists of air courier services and
data processing. The taxpayer must be primarily engaged in one of
these businesses and the jobs, investment, and activity with respect to
which a credit is claimed must be used in that business. These are the
same requirements as under prior law for air courier services. The
requirements are also the same for the businesses included within
data processing, but the kinds of businesses included under data
processing have changed and data processing qualifies only if the
services are provided to an entity that is not a related. See the
discussion of G. S. 105- 129.2 for an explanation of those changes.
( 3) Multiple business. This category consists of manufacturing,
warehousing, and wholesale trade. Under prior law, the taxpayer had
to be primarily engaged in one of those businesses and the jobs,
investment, and activity with respect to which a credit was claimed had
to be used in that business. For example, a taxpayer primarily
engaged in manufacturing did not qualify for credits for jobs,
investment, and activity carried on at a warehousing site. Those
requirements are relaxed for these three businesses.
As amended, the taxpayer must be primarily engaged in one of those
businesses and the jobs, investment, and activity with respect to
which a credit is claimed must be used in one of those businesses.
This means that a manufacturer qualifies for the credit if the jobs,
investment, and activity are carried on at a site at which the primary
activity is manufacturing, warehousing, or wholesale trade.
( 4) Single establishment. This category consists of computer services
and an electronic mail order house. The computer services must be
provided primarily to persons who are not related entities. The
electronic mail order house must create at least 250 new jobs and
must be located in a tier one, two, or three area. To be eligible for the
credits, computer services or an electronic mail order house must be
either the taxpayer’s primary business or the primary activity at an
establishment of the taxpayer and the jobs, investment, and activity
with respect to which a credit is claimed must be used in that
business.
( 5) Customer service center. To be an eligible business, the taxpayer
must satisfy all of the following requirements:
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The taxpayer’s primary business must be a telecommunications or
financial services company.
The customer service center must be the primary activity of an
establishment of the taxpayer located in a tier one, two, or three
area.
The jobs, investment, and activity with respect to which a credit is
claimed must be used in the establishment’s primary activity.
These are the same requirements as under prior law with one
exception. Under prior law, the establishment had to be in a tier one
or two area. Under the changes, the establishment can be in a tier
one, two, or three area.
( 6) Warehousing Option. This category is a second way for a taxpayer
engaged in warehousing to qualify for the credits. The multiple
business category includes a taxpayer whose primary business is
warehousing. This option applies if warehousing is not the primary
business of the taxpayer. This category was enacted for the benefit of
a specific taxpayer, but any taxpayer that meets the requirements is
eligible.
Under this option, the taxpayer is eligible for the credits if the taxpayer
satisfies the following requirements:
The primary activity of an establishment of the taxpayer is
warehousing.
The warehousing establishment is located in a tier one, two, or
three area and serves 25 or more establishments of the taxpayer
in at least five different counties in one or more states.
The jobs, investment, and activity with respect to which a credit is
claimed are used in the warehousing establishment.
( Effective for taxable years beginning on or after January 1, 2001; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( a1) – Changes Concerning New Job Creation: This
subsection was amended to make a clarifying change and a substantive
addition. The clarifying change concerns the period of time during which a
central office or aircraft facility may create the required 40 new jobs. The change
makes it clear that for a central office or aircraft facility, the 40 new jobs must be
created either ( i) within twelve months immediately following the date the
taxpayer first uses the property as a central office or aircraft facility or ( ii) if the
taxpayer uses temporary space during completion of the central office or aircraft
facility, within a 36- month period that includes the 24 months immediately
preceding and the 12 months immediately following the first use of the property
as central office or aircraft facility property. Under the prior law, it was not clear if
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the “ year” allowed for job creation was the taxpayer’s taxable year, the calendar
year, or a twelve- month period.
The substantive addition to this subsection establishes the minimum number of
jobs a taxpayer must create to qualify for the new tax credit for substantial
investment in other real property in G. S. 105- 129.12A and the time period in
which these jobs must be created. To qualify for the credit for substantial
investment in other real property, a taxpayer must create at least 200 additional
full- time employees to fill new positions at the location in a two- year period
beginning when the property is first used in an eligible business.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( a2) – Credit Expiration Changes: This subsection was
amended to make a clarifying change and a substantive change. The clarifying
change adds a sentence to make it clear that a subsequent change to the tier
designation of the area in which an establishment is located does not cause
installments of the credits to expire. This affects the new credit for substantial
investment in other property and the credits claimed by businesses with a
customer service center, an electronic mail order house, or certain warehousing
establishments. The new credit applies only in tier one and two areas. A
customer service center, an electronic mail order house, and a warehousing
establishment of a taxpayer whose primary business is not warehousing must be
in a tier one, two, or three area.
The substantive change establishes expiration provisions for installments of
credits claimed by a central office, an aircraft facility, or an electronic mail order
house. To qualify for an Article 3A credit, a central office or an aircraft facility
must create at least 40 new jobs and an electronic mail order house must create
at least 250 new jobs. Under the amendment, installments of a credit claimed by
one of these types of businesses expire when the number of jobs at the office,
facility, or house falls below the minimum threshold required to qualify. The
taxpayer may not take an expired installment.
For a central office or aircraft facility, this is a change from prior law. Before this
change, G. S. 105- 129.12( c) stated that installments of credits for a central office
or aircraft facility expired when the number of jobs at all the taxpayer’s central
office or aircraft facilities in this State dropped by 40 or more. For an electronic
mail order house, this change addresses an issue that was not addressed in the
prior law.
The new credit for substantial investment in other property, set out in G. S. 105-
129.12A, contains an expiration provision similar to the one amended in this
subsection. To qualify for the new credit, a business must create at least 200
new jobs. Under G. S. 105- 129.12A( c), an installment of that credit expires if the
number of jobs at the property falls below 200.
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( Effective November 29, 2001, and applies to tax years ending on or after that
date, SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.4( b)- Wage Standard Changes: This subsection was amended
to make various changes to the wage standard test and to require the
Department of Commerce to publish the wage standard for each county. The
changes to the wage standard consist of three clarifying changes, one
conforming change, and one substantive change. The first clarifying change
adds a sentence stating that no jobs tax credit is allowed for jobs not included in
the wage calculation.
The second clarifying change requires all positions that were filled for at least
1,600 hours during the calendar year in which the qualifying activity occurred to
be included in the calculation of whether all jobs at a location meet the wage
standard. This ensures that a taxpayer determines the average wage of
employees at a location based on all full- time jobs, including those subject to
seasonal layoffs. For tax years beginning before January 1, 2002, the average
wage for all jobs at a location was a factor in determining eligibility for credits
other than the jobs tax credit and the worker training credit, such as the credit for
investing in machinery and equipment. For tax year 2002 and subsequent tax
years, the average wage for all jobs at a location is also a factor in determining
eligibility for the jobs tax credit and the worker training credit, as explained in the
discussion of the substantive change to this subsection.
The third clarifying change deletes references to the time a taxpayer applies for a
credit and substitutes references to the calendar year in which the taxpayer
engages in a qualifying activity. Read literally, the law before this change
required the taxpayer to meet the wage standard for the year in which the
taxpayer applied for the credit, even if the taxpayer first claimed the credit on an
amended return filed two years after the original return. The Department did not
interpret these provisions literally, however. Instead, the Department construed
these provisions to mean the year in which the qualifying activity occurred.
The conforming change inserts a reference to the new credit for a substantial
investment in other property, set out in G. S. 105- 129.12A. The average wage of
all jobs at a location must meet the wage standard for a taxpayer to qualify for
the new credit.
The substantive change sets a new wage standard for the credit for creating new
jobs and the worker training credit, effective with tax year 2002. The new
standard is a two- part test. Under the new test, both the average wage of the
jobs for which the credit is claimed and the average wage of all jobs at the facility
must meet the wage standard.
( First and second clarifying changes effective September 14, 2001; SB 165, ss.
7 and 53, S. L. 01- 414; third clarifying change, conforming change, and
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substantive change to the wage standard effective for taxable years beginning
on or after January 1, 2002; SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.4( b1) – Large Investment Conforming Change – This
subsection was amended to conform with the changes to G. S. 105- 129.6. As
rewritten, that statute no longer requires the Department of Commerce to certify
a taxpayer’s eligibility for the Article 3A credits. To be eligible for the large
investment enhancements in Article 3A, a taxpayer must obtain a written
determination from the Department of Commerce that the taxpayer is expected
to meet the large investment thresholds.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( b2) – Health Insurance Conforming Change: This subsection
was amended to conform with the changes to G. S. 105- 129.6. As rewritten, that
statute eliminates the requirement that a taxpayer obtain a certification from the
Department of Commerce to claim the credits in Article 3A.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( b3) – Environmental Impact Conforming Change: This
subsection was amended to conform with the changes to G. S. 105- 129.6. As
rewritten, that statute eliminates the requirement that a taxpayer obtain a
certification from the Department of Commerce to claim the Article 3A credits.
Under prior law, the Department of Commerce reported to the Department of
Environment and Natural Resources ( DENR) those taxpayers who claimed on
their applications for certification to meet the environmental impact eligibility
requirements. As amended, DENR must annually report to the Department of
Revenue those persons who have pending actions concerning significant
violations or have had final determinations of responsibility for significant
violations during the last five years. The Department of Revenue can then use
the information provided by DENR when reviewing the returns on which tax
credits are claimed.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( b4) – Safety and Health Conforming and Substantive
Changes: This subsection was amended to make a substantive change and a
conforming change. The substantive change revises the safety and health
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eligibility requirements effective retroactively to tax year 2000. The change was
made to enable a particular taxpayer to qualify for the Article 3A credits.
To be eligible for the Article 3A credits, a taxpayer must have a good OSHA
record at the business location where the qualifying business activity occurs.
Under prior law, a good OSHA record meant that the taxpayer had no
outstanding OSHA citations and had no serious violations within the last three
years. As amended, the term means that the taxpayer has no citations that have
become a final order within the past three years for willful serious violations or for
failing to abate serious violations.
The conforming changes reflect the changes made to G. S. 105- 129.6. That
statute was rewritten to eliminate the requirement that a taxpayer obtain a
certification from the Department of Commerce to claim the Article 3A credits.
Under prior law, the Department of Commerce reported to the Department of
Labor ( DOL) those taxpayers who claimed on their applications for certification to
meet the safety and health eligibility requirements. As amended, DOL must
annually report to the Department of Revenue those employers who have had
final orders for serious violations within the past three years. The Department of
Revenue can then use the information provided by DOL when reviewing the
returns on which tax credits are claimed.
( Substantive change to eligibility requirements effective retroactively for taxable
years beginning on or after January 1, 2000; SB 748, s. 5, S. L. 01- 476;
conforming changes effective for taxable years beginning on or after January 1,
2002; SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.4( b5) – Eligibility for New Credit: This subsection was enacted
to establish eligibility requirements for the new credit for a substantial investment
in other real property, set out in G. S. 105- 129.12A. To be eligible for the new
credit, a taxpayer must obtain a written determination from the Department of
Commerce that the taxpayer is expected to make the necessary investment and
create the necessary new jobs within the required time periods. If the taxpayer
fails to make the required level of investment or timely create the required
number of new jobs, the taxpayer forfeits the credit.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( d) – Forfeiture Conforming Changes: This subsection was
amended to make two conforming changes. The first change reflects the
changes made to G. S. 105- 129.6. That statute was rewritten to eliminate the
requirement that a taxpayer obtain a certification from the Department of
Commerce to claim the Article 3A credits. As a result, this subsection was
amended to delete references to making an application for a tax credit and
certification by the Department of Commerce.
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The second conforming change adds a forfeiture provision for the new credit for
substantial investment in other property, set out in G. S. 105- 129.12A. That
credit requires the creation of 200 new jobs within two years and an investment
of at least $ 10 million within three years. The credit is forfeited if the taxpayer
does not meet either of these requirements.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( e) – Clarifying Change: This subsection was amended to clarify
the term “ business” for purposes of determining whether the business has
changed ownership. A business is either a taxpayer or an establishment. G. S.
105- 129.2 sets out the new definition of establishment.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 6,
S. L. 01- 476.)
G. S. 105- 129.4( g) – Advisory Ruling: This subsection was enacted to inform
taxpayers that they can seek an advisory ruling from the Department of Revenue
regarding their eligibility for tax credits. A written ruling will enable a taxpayer to
determine in advance whether planned activity will qualify for a credit.
( Effective November 29, 2001; SB 748, s. 6, S. L. 01- 476.)
G. S. 105- 129.5 – R& D Carryforward Extended, New Statute of Limitations,
and Conforming Changes: The catchline to this section was amended to add a
reference to the new statute of limitations, subsection ( c) was amended to make
substantive and conforming changes, and new subsection ( d) was added. New
subsection ( d) is effective for tax years beginning on or after January 1, 2001.
The other changes are effective for tax years beginning on or after January 1,
2002.
The substantive changes to subsection ( c) extend the carryforward period for the
tax credit for research development from five years to 15 years and insert a 20-
year carryforward for the new credit for a substantial investment in other
property, set out in G. S. 105- 129.12A. The conforming changes reflect the
changes made to G. S. 105- 129.6. That statute was rewritten to eliminate the
requirement that a taxpayer obtain a certification from the Department of
Commerce to claim the Article 3A credits. References in this subsection to
certification by the Department of Commerce were therefore deleted.
New subsection ( d) was enacted to establish a special statute of limitations for
claiming the Article 3A tax credits. Section 7( a) of Chapter 476 of the 2001
Session Laws states that the General Assembly finds that the purpose of the
Article 3A credits is to encourage the creation of new quality jobs and to
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Tax Administration Page 19 2001 Tax Law Changes
encourage new investment in machinery and equipment, research and
development, and real property and that “ allowing taxpayers to file amended
returns and retroactively claim credits under that Article does not further this
purpose of encouraging job creation and new investment.”
Under the new limitation, a credit must be claimed within six months after the
due date of the return on which the taxpayer can first claim the credit. The due
date includes extensions received by the taxpayer.
The return on which the taxpayer can first claim the credit is the return for the
year in which the taxpayer engages in the activity that qualifies for the credit.
This applies both to credits for which a taxpayer qualifies in one year and then
takes in installments in subsequent years and to credits that are taken in the year
in which the taxpayer engages in the activity that qualifies for the credit. Form
NC- 478 and the applicable NC- 478 letter series form must be filed within six
months after the due date of the return for the year in which the taxpayer
engages in the activity that qualifies for the credit.
This new requirement is a statute of limitations. It cannot be waived or extended
by the Department. The Department cannot accept a return on which an Article
3A tax credit is claimed unless the return is filed within the six- month time limit
set in this subsection.
( Changes to subsection ( c) effective for taxable years beginning on or after
January 1, 2002, and apply to credits that are first claimed on or after that date;
new subsection ( d) effective for taxable years beginning on or after January 1,
2001; SB 748, s. 7, S. L. 01- 476.)
G. S. 105- 129.6 – No Application Process, Fees Paid to DOR, and Reports
and Disclosure by DOR: This section was rewritten to eliminate the confusion
caused by having two different agencies, the Department of Commerce and the
Department of Revenue, involved in the tax credit process. The confusion is
eliminated by removing the Department of Commerce from the role of receiving
applications for tax credits, issuing certifications of approval, and reporting on
various aspects of the tax credits.
No Application for Certification. The step of applying for an Article 3A tax credit
is eliminated. Subsection ( a), which required a taxpayer to obtain a certification
from the Department of Commerce before claiming a tax credit, is repealed.
This change is effective for all business activities occurring on or after January 1,
2002, and it is effective for activities occurring before January 1, 2002, if the
taxpayer did not file an application with the Department of Commerce by January
1, 2002. The goal is to eliminate applications for certification for tax credits for
returns filed for tax year 2002.
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The year 2002, however, is a transition year for eliminating the application for
certification. As of January 1, 2002, some taxpayers had submitted applications
to the Department of Commerce for credits for which they qualified in tax year
2001 or an earlier year and some had not because they were waiting until closer
to the due date of the return in 2002 or because they had not yet filed an
amended return to claim a credit for a prior year. A taxpayer who had not filed
an application as of January 1, 2002, must still file an application with the
Department of Commerce if the taxpayer includes the tax credit on a return filed
in 2002. The application, however, is simply a method of collecting the required
fee. The Department of Commerce will not make any determinations about
eligibility based on this application. The Department of Commerce must mark on
the application that the fee has been paid. The taxpayer must then attach the
marked application to the taxpayer’s tax return.
The Department of Commerce’s role in the application process ends on January
1, 2003. If a taxpayer that qualified for a tax credit before January 1, 2002, has
not submitted an application to the Department of Commerce by January 1,
2003, the taxpayer must provide the information required by the Department of
Revenue when filing a return that includes the credit and must pay any required
fee to the Department of Revenue. The taxpayer is not required to interact with
the Department of Commerce in claiming the credit.
Fee Paid to DOR. Subsection ( a1) was rewritten to require the fee that must be
paid by taxpayers before they can claim some of the Article 3A credits to be paid
to the Department of Revenue instead of the Department of Commerce. As
rewritten, the fee must be paid by the taxpayer when filing a tax return for the
taxable year in which the taxpayer engaged in the activity that qualifies the
taxpayer for an Article 3A credit. Under prior law, the fee was paid when an
application for certification was submitted to the Department of Commerce.
The fee is due at the time the return is due and the credit is not allowable until
the fee is paid. The Department of Revenue retains 75% of the fee proceeds
and credits the remaining fee proceeds to the Department of Commerce. The
fee amount and the allocation of the fee between the Departments of Revenue
and Commerce remain the same. The Department of Revenue, rather than the
Department of Commerce, is the agency that collects the fee.
Reports Made by DOR. Subsection ( b), which required the Department of
Commerce to issue an annual report on the Article 3A credits, was rewritten to
require the Department of Revenue, rather than the Department of Commerce,
to prepare and publish the report, to change the reporting date, to expand the
information required in the report, and to include the names of taxpayers
receiving the credits. With the elimination of the application to the Department of
Commerce, the Department of Commerce will not have data to prepare a report.
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As rewritten, the report is due by March 1 and covers the twelve- month period
ending the preceding December 31. Before the change, the report was due by
May 1 and covered the twelve- month period ending the preceding April 1. The
reporting change is effective for business activities occurring on or after January
1, 2002. The first report published by the Department of Revenue under the new
requirements is therefore due March 1, 2003, and will cover the twelve- month
period ending December 31, 2002.
The information required to be included in the report was expanded to include
the names of the taxpayers qualifying for and claiming the credits and specific
information about the credits. The specific additional information includes
information about tier areas for which credits are claimed, the worker training
credit, the research and development credit, and the new credit for substantial
investment in other property. The secrecy prohibition in G. S. 105- 259 is
amended to allow the disclosure of taxpayer names to meet the requirements of
subsection ( b).
( Effective for business activities occurring on or after January 1, 2002, and for
certain activities occurring before January 1, 2002, HB 338, s. 123, S. L. 01- 487
and SB 748, s. 8( a) and ( c), S. L. 01- 476. Note that Section 123 of Chapter 487
changed the original effective date of Section 8( a) of Chapter 476.)
G. S. 105- 129.7( b) – Reporting New Jobs and Conforming Changes: Three
subdivisions of subsection ( b) were amended to make one substantive and two
conforming changes. The substantive change, in subdivision ( b)( 1), eliminates
the requirement that taxpayers, when providing substantiating information about
new jobs created, identify whether the new employee lived in a development
zone when the employee took the job. Instead, if jobs for which a credit is taken
are located in a development zone, the taxpayer must identify the number of
those jobs that are filled by residents of the development zone.
Subdivisions ( b)( 3) and ( b)( 4) were amended to make two conforming changes.
The first change reflects the changes made to G. S. 105- 129.6. That statute was
rewritten to eliminate the requirement that a taxpayer obtain a certification from
the Department of Commerce to claim the Article 3A credits. As a result,
subdivision ( b)( 3) was amended to delete a reference to certification of an
investment amount.
The second conforming change reflects the enactment of the credit for a
substantial investment in other property, set out in G. S. 105- 129.12A.
Subdivisions ( b)( 3) and ( b)( 4) were amended to add references to this new
credit.
( Effective for taxable years beginning on or after January 1, 2002, SB 748, s. 9,
S. L. 01- 476.)
North Carolina Department of Revenue
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G. S. 105- 129.8( a)- Clarifying and Technical Changes: The first sentence of
this subsection was amended to make it clear that the relevant year is the
taxable year instead of the calendar year. Other provisions of this subsection
were amended to make stylistic changes that do not affect the meaning of the
statute.
( Effective September 14, 2001; SB 165, ss. 8 and 53, S. L. 01- 414.)
G. S. 105- 129.9( b) – Conforming Change: This subsection was amended to
conform with the changes made to G. S. 105- 129.6. That statute was rewritten to
eliminate the requirement that a taxpayer obtain a certification from the
Department of Commerce to claim the Article 3A credits. As a result, this
subsection was amended to delete the requirement that the taxpayer include
with the application information showing how the taxpayer calculated the eligible
investment amount.
( Effective for taxable years beginning on or after January 1, 2002, and applies to
machinery and equipment first placed in service on or after that date; SB 748, s.
10, S. L. 01- 476.)
G. S. 105- 129.9( c) – M& E Threshold Determined by Establishment: This
subsection was amended to apply the investment threshold for purposes of the
credit for investing in machinery and equipment to each establishment rather
than to each enterprise tier. Before the change, a taxpayer that had two or more
locations in an enterprise tier could add the amount invested at each location in
the tier in determining whether the taxpayer met the investment threshold. With
the change, the threshold applies separately to each establishment and the
taxpayer cannot add the amounts invested at each location. As a result, more
investment is required to qualify for the credits.
( Effective for taxable years beginning on or after January 1, 2002, and applies to
machinery and equipment first placed in service on or after that date; SB 748, s.
10, S. L. 01- 476.)
G. S. 105- 129.9A – Conforming Changes: Subsections ( c), ( d), and ( e) of this
section were amended to conform with the changes made to G. S. 105- 129.6.
That statute was rewritten to eliminate the requirement that a taxpayer obtain a
certification from the Department of Commerce to claim the Article 3A credits.
As a result, subsection ( c) of this section was amended to eliminate the duty of
the Secretary of Commerce to obtain an opinion from the Attorney General
before certifying an application in certain circumstances and to replace it with a
North Carolina Department of Revenue
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duty of the taxpayer to obtain a ruling from the Department of Revenue.
Subsections ( d) and ( e) were amended to delete references to certification.
( Effective for taxable years beginning on or after January 1, 2002; SB 748, s. 10,
S. L. 01- 476.)
G. S. 105- 129.12( c) – Expiration of Credit for Investing in Central Office or
Aircraft Facility Property: This subsection was amended to conform to the
change made to G. S. 105- 129.4 concerning the expiration of an installment of
the credit for investing in central office or aircraft facility property. Under G. S.
105- 129.4, as amended, the credit expires if the number of jobs at the office or
facility falls below the 40 required to qualify for the credit. Before this change,
the credit expired if the number of jobs at all the taxpayer’s central office or
aircraft facilities in the State dropped by 40 or more. The sentence contained in
this subsection about the expiration is deleted and G. S. 105- 129.4 governs the
expiration of the installments.
( Effective for taxable years beginning on or after January 1, 2001; SB 748, s. 12,
S. L. 01- 476.)
G. S. 105- 129.12A – New Credit for Substantial Investment in Other
Property: This section was enacted to benefit a specific taxpayer. It applies,
however, to any taxpayer that meets the requirements set in the statute.
The section provides a tax credit for substantial investment in other real property.
Subsection ( a) provides that a taxpayer is eligible for this credit if the taxpayer
begins to use real property located in a tier one or tier two area in an eligible
business during the tax year. The Department of Commerce must make a
written determination that the taxpayer will invest at least $ 10 million in real
property at the location within a three- year period and that the location will create
at least 200 new jobs within two years of the time the property is first used in the
eligible business.
The credit is equal to 30% of the eligible investment amount, which is the lesser
of ( i) the cost of the property and ( ii) the amount by which the cost of all of the
real property the taxpayer is using in this State in an eligible business on the last
day of the tax year exceeds the cost of all real property used by the taxpayer on
the last day of the base year. The base year is the year of the last three
preceding years in which the taxpayer had the most real property. In the case of
leased property, the cost of the property is equal to the taxpayer’s lease
payments over a seven- year period, plus any expenditures made by the taxpayer
to improve the property before it is used by the taxpayer if the expenditures are
not reimbursed or credited by the lessor.
The credit is taken in seven equal installments beginning in the year following the
year in which the property is first used in an eligible business. When part of the
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property is first used in an eligible business in one year and another part is first
used in an eligible business in a subsequent year, separate credits may be
claimed. The basis in the real property for which a credit is claimed must be
reduced by the amount of credit allowable.
Subsection ( b) provides a method of calculating the credit if only a portion of the
property is used in an eligible business. In this circumstance, the amount of
allowable credit is reduced by multiplying the allowable credit by the percentage
of the square footage of the property actually used in an eligible business.
Subsection ( c) provides for the expiration or reduction of the credit. If, in one of
the seven years in which the installments of the credit accrue, part or all of the
property is no longer used in the business or the number of employees at the
property is less than 200, the remaining installments expire.
Subsection ( d) provides that a taxpayer may not claim this credit if a credit for
investing in central office or aircraft facility property is taken for the same
property.
( Effective for taxable years beginning on or after January 1, 2002, and applies to
real property first used in an eligible business on or after that date; SB 748, s.
13, S. L. 01- 476.)
G. S. 105- 129.13 - Clarifying and Conforming Changes: Subsection ( c) was
amended to make it clear that the reference to the Secretary in this subsection
means the Secretary of Commerce rather than the Secretary of Revenue. The
Secretary of Commerce is responsible for collecting certain information from a
development zone agency before certifying an improvement project, not the
Secretary of Revenue.
Subsection ( e) was amended to conform with the changes made to G. S. 105-
129.6. That statute was rewritten to eliminate the requirement that a taxpayer
obtain a certification from the Department of Commerce to claim the Article 3A
credits. As a result, this subsection was amended to delete the reference to the
application that was formerly required under G. S. 105- 129.6.
( Clarifying change effective September 14, 2001; SB 165, ss. 9 and 53, S. L. 01-
414; conforming change effective for taxable years beginning on or after January
1, 2002; SB 748, s. 14, S. L. 01- 476.)
North Carolina Department of Revenue
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VI. BUSINESS AND ENERGY TAX CREDITS
Article 3B
G. S. 105- 129.15( 4a) – Pass- through Entity Defined: New subdivision ( 4a) was
added to define “ pass- through entity.” The term is applied in the credit for low-income
housing. The definition is the same as that established under Article 3D
for the credit for historic rehabilitation. A pass- through entity includes a limited
partnership, a general partnership, a joint venture, a Subchapter S Corporation,
and a limited liability company.
( Effective January 1, 2001; SB 181, ss. 1 and 4, S. L. 01- 431.)
G. S. 105- 129.16B - Special Allocation and Forfeiture of Credit for Low-
Income Housing: This section was amended to add a new allocation provision
concerning pass- through entities and to revise the provisions for forfeiture of the
credit. New subsection ( b1) allows a pass- through entity that qualifies for the
credit to allocate the credit among any of its owners in its discretion as long as
the amount of credit allocated to an owner does not exceed the owner’s adjusted
basis in the pass- through entity at the end of the taxable year in which the
federal credit is first claimed. An explanation of the allocation made under this
new subsection and the allocation that would have been required if this change
had not been enacted must be included with the tax returns filed by the pass-through
entity and the owners for each year in which the allocated credit is
claimed.
Subsection ( e) was rewritten and subsections ( f) and ( g) were added concerning
forfeiture of the credit. Subsection ( e) was amended to delete the provisions on
the effect of forfeiture and to stipulate that forfeiture applies to owners of a pass-through
entity in the same proportion that the credit was allocated.
Subsection ( f) was added to require an owner of a pass- through entity to forfeit a
portion of the credit for low- income housing if the owner disposes of more than
one- third of the owner’s interest in the pass- through entity within five years from
the date the federal credit is first claimed. The forfeiture amount is determined
by multiplying the amount of the credit by the percentage reduction in ownership
and then multiplying that product by an amount that equals the federal recapture
percentage found in section 50( a)( 1)( B) of the Internal Revenue Code. The
remaining allowable credit is allocated equally among the five years in which the
credit is claimed. The credit is not forfeited if the change in ownership is the
result of either the death of the owner or a merger, consolidation, or similar
transaction.
The provisions concerning the effect of a forfeiture that were deleted from
subsection ( e) are recodified in new subsection ( g). The provisions are moved
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from subsection ( e) to this new subsection because they apply to forfeitures
under both subsection ( e) and new subsection ( f).
( Effective for taxable years beginning on or after January 1, 2001, and applies to
buildings placed in service on or after that date; SB 181, ss. 2 and 4, S. L. 01-
431.)
G. S. 105- 129.17( a) - Insurers Can Claim Low- Income Housing Credit: This
subsection was amended to permit the credit for low- income housing to be
claimed against the gross premiums tax levied in Article 8B. Prior to the
amendment, the credit was permitted only against the franchise or income tax
liability levied in Article 3 and Article 4, respectively. The purpose of this change
is to expand the pool of taxpayers that can benefit from the low- income housing
credit and thereby increase the market for these credits.
( Effective for taxable years beginning on or after January 1, 2001, and applies to
buildings placed in service on or after that date; SB 181, ss. 3 and 4, S. L. 01-
431.)
G. S. 105- 129.19 - Technical Change: This subsection was amended to
designate the Revenue Laws Study Committee rather than the Legislative
Research Commission as the entity to receive the Department of Revenue’s
report on Article 3B tax credits.
( Effective September 14, 2001; SB 165, s. 10, S. L. 01- 414.)
VII. HISTORIC REHABILITATION TAX CREDITS
Special Allocation Provision Extended: S. L. 1999- 389 included a special
provision in G. S. 105- 129.35( b) that allows a pass- through entity that qualifies for
the credit for rehabilitating income- producing historic property to allocate the
credit among any of its owners in its discretion as long as the amount of credit
allocated to an owner does not exceed the owner’s adjusted basis in the pass-through
entity at the end of the taxable year in which the rehabilitated structure is
placed in service. The special allocation provision was effective for taxable
years beginning on or after January 1, 1999, and was scheduled to expire
effective January 1, 2002, for property placed in service on or after that date.
The expiration date is now extended to January 1, 2004.
( Effective November 29, 2001, SB 748, s. 19, S. L. 01- 476.)
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VIII. CORPORATE INCOME TAX
G. S. 105- 130.4( a)( 4) – Excluded Corporation Clarifying Change: This
subdivision was amended to clarify that a corporation is an excluded corporation
if it receives more than 50% of its ordinary gross income from intangible
property. The amendment deletes the phrase “ investments in and/ or dealing in”
from the description of a corporation that falls under the category of an excluded
corporation.
The amendment was added as part of the royalty reporting option provisions.
Some intangible holding companies have argued to the Department that they are
not excluded corporations because they do not “ deal in” trademarks, in the sense
of regularly buying and selling trademarks as if the trademarks were securities on
an exchange. This argument distorts the meaning of the statutes and is contrary
to the Department’s longstanding application of the statute.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s.
1( c) and ( f), S. L. 01- 327.)
G. S. 105- 130.5 – Conforming Change: This section was amended to conform
to the new name of the former Office of State Budget, Planning, and
Management. The General Assembly eliminated the planning function from that
Office and renamed it the Office of State Budget and Management.
( Effective July 1, 2001; SB 1005, s. 12.2( b), S. L. 01- 424.)
G. S. 105- 130.5( a)( 7) – Dividends Received Add- Back Repealed: This statute
was repealed as part of the changes made to the corporate income tax laws to
conform North Carolina’s deduction for subsidiary dividends to federal law, net of
expenses. The repealed subdivision required taxpayers to add back to federal
taxable income, for the purpose of calculating North Carolina taxable income, the
amounts deducted from their federal taxable income under sections 241 through
247 of the Internal Revenue Code as dividends received.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s.
3( a), S. L. 01- 327.)
G. S. 105- 130.5( a)( 13) – FSC Add- Back Repealed: This subdivision was
repealed because it is obsolete by virtue of the federal repeal of the Foreign
Sales Corporation.
( Effective January 1, 2002; HB 232, s. 4( b), S. L. 01- 427.)
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G. S. 105- 130.5( a)( 14) – New Royalty Payment Add- Back: This subdivision
was added as part of the royalty reporting option provisions. It requires the payer
of royalty payments to add the payments to its federal taxable income unless the
recipient of the royalty payments includes the royalty income from the payments
in the recipient’s income. New G. S. 105- 130.7A( c) sets out the options for
reporting royalty payments.
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the addition of
royalty payments to income under this subdivision.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
1( d) and ( f), S. L. 01- 327.)
G. S. 105- 130.5( b)( 3a) – Deduction for Foreign Source Dividends: This
subdivision was added as part of the changes made to the corporate income tax
laws to conform North Carolina’s deduction for subsidiary dividends to federal
law. The subdivision provides a deduction from federal taxable income for an
item that is included in federal gross income and is related to dividends received
but is not deductible under sections 243 through 247 of the Internal Revenue
Code. The item is dividends treated under section 862 of the Code as received
from sources outside the United States. The deduction is net of related
expenses.
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the changes made
to the laws concerning the deduction of dividends.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
3( b) and ( c), S. L. 01- 327 and HB 232, s. 10, S. L. 01- 427.)
G. S. 105- 130.5( b)( 3b) – Deduction For Items Related to Dividends: This
subdivision was added as part of the changes made to the corporate income tax
laws to conform North Carolina’s deduction for subsidiary dividends to federal
law. The subdivision provides a deduction from federal taxable income for two
items that are included in federal gross income and are related to dividends
received but are not deductible under sections 243 through 247 of the Internal
Revenue Code. One item is the amount treated as dividends received from a
foreign corporation under section 78 of the Code. The other item is a
shareholder’s pro rata share of the income of a foreign controlled corporation
under subpart F, section 951 of the Code. The deduction for both items is net of
related expenses.
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Tax Administration Page 29 2001 Tax Law Changes
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the changes made
to the laws concerning the deduction of dividends.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
3( b) and ( c), S. L. 01- 327 and HB 232, s. 10, S. L. 01- 427.)
G. S. 105- 130.5( b)( 20) – Deduction for Royalty Income: This subdivision was
added as part of the royalty reporting option provisions. It allows the recipient of
royalty income to deduct this income from federal taxable income, for the
purpose of computing North Carolina taxable income, if the corporation that
made the royalty payments adds the payments to its income under G. S. 105-
130.5( a)( 14).
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s.
1( e), S. L. 01- 327.)
G. S. 105- 130.7( b) – Subsidiary Dividend Deduction Repealed: This statute
was repealed as part of the changes made to the corporate income tax laws to
conform North Carolina’s deduction for subsidiary dividends to federal law, net of
expenses. Prior State law required taxpayers to add to their federal taxable
income the dividend deductions allowed under federal law and then allowed
taxpayers to deduct subsidiary dividends in accordance with this subdivision.
This subdivision allowed a corporation to deduct all dividends received from
corporations in which it owned more than 50% of the stock and, by application of
G. S. 105- 130.5( b)( 3) and ( c)( 3), did not require the deduction to be reduced by
related expenses.
As a result of the repeal of this subdivision and G. S. 105- 130.5( a)( 7), taxpayers
do not have to adjust their federal taxable income to add back their federal
dividends received deduction and then subtract from that adjusted amount the
North Carolina dividend deduction. The amount already deducted in their federal
taxable income will flow through to their North Carolina taxable income. The
amount deducted under federal law, however, must be reduced in accordance
with G. S. 105- 130.5( c)( 3) for expenses.
The change in the taxation of subsidiary dividends was one of the
recommendations of the North Carolina Efficiency and Loophole- Closing
Commission. That Commission, co- chaired by former Governors Jim
Holshouser and Bob Scott and former State Treasurer Harlan Boyles,
recommended that North Carolina’s law on subsidiary dividends be changed to
conform to the federal law. The Commission found that this change would have
no anti- competitive effects on businesses.
North Carolina Department of Revenue
Tax Administration Page 30 2001 Tax Law Changes
A special penalty exception applies for tax years beginning in calendar year
2001. No underpayment penalty under G. S. 105- 164.31 applies with respect to
an underpayment that was created or increased as a result of the repeal of this
subdivision.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, ss.
3( a) and ( c), S. L. 01- 327.)
G. S. 105- 130.7A – Royalty Income: This new statute clarifies that royalties
from the use of trademarks in this State are income derived from doing business
in this State and are therefore subject to North Carolina income tax and sets out
new reporting options for royalty payments and income. Under the options,
royalty income from the use of a trademark in North Carolina may be reported in
either of two ways if the payer and the recipient are related entities. First, the
recipient of the payments can include the payments in its North Carolina income
and the company making the payments can deduct the payments from the
company’s North Carolina income. Second, the recipient of the payments can
exclude the payments from its North Carolina income and the company making
the payments can add the payments to the company’s North Carolina income.
The options in new G. S. 105- 130.7A are reporting options and not filing options.
A corporation that receives royalty payments for the use of trademarks in this
State is doing business in this State and must file an income tax return and a
franchise tax return. The reporting option for royalty payments for the use of
trademarks does not apply to interest income, income from patents, or any other
income reportable to North Carolina.
This statute is the result of a change recommended by the North Carolina
Efficiency and Loophole- Closing Commission and pursued by the General
Assembly. The Commission, co- chaired by former Governors Jim Holshouser
and Bob Scott and former State Treasurer Harlan Boyles, recommended that
North Carolina adopt the Ohio and Connecticut approach to royalty expenses
between related companies and disallow the deduction of these expenses. The
Ohio law was introduced in Senate Bill 1058 of the 2001 Session. The
provisions in Senate Bill 1058 were modified after consultation with businesses
to include the options set out in this statute and then incorporated in House Bill
1157.
This statute was enacted to address a problem with the current law identified by
the Department of Revenue and reported to the Efficiency and Loophole- Closing
Commission. The problem is the lack of compliance by intangible holding
companies with the requirement to file returns and pay taxes on their royalty
income derived from North Carolina. Section 1 of House Bill 1157 reflects this
concern. That section states that the “ General Assembly finds that most
corporations engaged in manufacturing and retailing activities in this State
comply with the State tax on income generated from using trademarks in those
North Carolina Department of Revenue
Tax Administration Page 31 2001 Tax Law Changes
activities” but that the taxpayers who do not comply create an unfair burden on
those who do.
( Effective for taxable years beginning on or after January 1, 2001; HB 1157, s. 1,
S. L. 01- 327.)
G. S. 105- 130.41 – Ports Tax Credit Extended: The sunset on this credit, which
had expired for taxable years ending after February 28, 2001, was extended.
The credit now sunsets for taxable years beginning on or after January 1, 2003.
( Effective for taxable years beginning on or after March 2, 2000; HB 1388, ss. 1
and 2, S. L. 01- 517.)
IX. INDIVIDUAL INCOME TAX
G. S. 105- 134.2( a): Temporary Tax Rate Increase – This subdivision was
amended to add a new 8.25% temporary marginal income tax rate bracket above
the current top bracket of 7.75%. The rate applies to the 2001 tax year and
expires effective with the 2004 tax year.
The new 8.25% individual income tax rate bracket applies as follows: Married
individuals filing joint returns – 8.25% on taxable income over $ 200,000; Heads
of households – 8.25% on taxable income over $ 160,000; Unmarried individuals
other than surviving spouses and heads of households – 8.25% on taxable
income over $ 120,000; and Married individuals filing separately – 8.25% on
taxable income over $ 100,000.
Because the new bracket was enacted late in the tax year to which it first
applies, taxpayers subject to this new rate are protected from underpayment
penalties that could otherwise apply as a result of the increased liability.
Notwithstanding G. S. 105- 163.15, no addition to tax may be made for a taxable
year beginning on or after January 1, 2001, and before January 1, 2002, with
respect to an underpayment of individual income tax to the extent the
underpayment was created or increased by the new tax rate.
( Effective for taxable years beginning on or after January 1, 2001, and expires
for taxable years beginning on or after January 1, 2004; SB 1005, s. 34.18, S. L.
01- 424.)
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Tax Administration Page 32 2001 Tax Law Changes
G. S. 105- 134.6( b)( 16) – Conforming Change: This section was amended to
conform to the new name of the former Office of State Budget, Planning, and
Management. The General Assembly eliminated the planning function from that
Office and renamed it the Office of State Budget and Management.
( Effective July 1, 2001; SB 1005, s. 12.2( b), S. L. 01- 424.)
G. S. 105- 134.6( c) – Elimination of Standard Deduction Marriage Penalty:
This subsection was amended in two phases to eliminate the marriage penalty
with respect to the standard deduction. The term “ marriage penalty” refers to the
imposition of a higher income tax liability on a married couple than on two single
individuals due to two factors. One factor is the difference in the amounts
allowed single taxpayers and married taxpayers as a standard deduction. The
other factor is the difference in the thresholds for single taxpayers and married
taxpayers under the marginal income tax rates. The standard deduction for a
married couple is less than the standard deduction for a single taxpayer
multiplied by two. Similarly, the thresholds for the marginal tax rates for a
married couple occur at lower taxable income amounts than the thresholds for a
single taxpayer multiplied by two.
The General Assembly amended this subsection to end the marriage penalty
with respect to the standard deduction but did not change the marriage penalty
with respect to the marginal rate thresholds. The penalty attributable to the
thresholds remains and is perpetuated in the new 8.25% bracket explained
under G. S. 105- 134.2( a).
Under the changes made to this subsection, the standard deduction for a
married couple filing jointly and for a married individual filing separately
increases over a two- year period beginning with tax year 2002 to an amount that
eliminates the marriage penalty attributable to the standard deduction. Effective
with the 2002 tax year, the standard deduction for taxpayers whose filing status
is married filing jointly increases from $ 5,000 to $ 5,500. Effective with the 2003
tax year, the standard deduction for taxpayers whose filing status is married filing
jointly increases from $ 5,500 to $ 6,000. Similarly, effective with the 2002 tax
year, the standard deduction for married individuals whose filing status is married
filing separately increases from $ 2,500 to $ 2,750, and then increases from
$ 2,750 to $ 3,000 effective with the 2003 tax year. As a result, for the 2003 tax
year, the standard deduction for a married couple filing jointly will be twice the
standard deduction for a single taxpayer and the standard deduction for a
married taxpayer who files separately will be the same as the standard deduction
for a single taxpayer.
( Effective for taxable years beginning on or after January 1, 2002; SB 1005, s.
34.19( a) and ( b), S. L. 01- 424.)
North Carolina Department of Revenue
Tax Administration Page 33 2001 Tax Law Changes
G. S. 105- 151.12( f) – Credit for Certain Real Property Donations: This
subsection was enacted to create a temporary exception to the change made to
G. S. 105- 269.15( a) concerning the calculation of tax credits by partnerships.
The temporary exception applies for tax years 2002, 2003, and 2004.
Under the change made to G. S. 105- 269.15( a), a maximum dollar limit on a tax
credit applies to a partnership as a whole rather than to each of the individual
partners. This subsection preserves the application of the dollar limit on the
credit for real property donations at the individual partner level.
G. S. 105- 151.12( a) limits the credit for certain real property donations to
$ 250,000. If a partnership with four partners qualifies for a $ 1,000,000 tax credit,
each partner can claim a tax credit of $ 250,000. Without new subsection ( f),
each partner could claim a tax credit of only $ 62,500 ( one- fourth of the maximum
$ 250,000).
This exception was enacted at the request of the Department of Environment
and Natural Resources. That Department was concerned that the application of
the maximum credit at the partnership level rather than the partner level would
decrease the amount of property donated for land conservation purposes.
( Effective for taxable years beginning on or after January 1, 2002, and expires
for taxable years beginning on or after January 1, 2005; HB 146, ss. 2 and 3,
S. L. 01- 335.)
G. S. 105- 151.21( b)( 1) – Technical Change: This subdivision was amended to
make a technical change to the definition of farm machinery that applies to the
tax credit for property taxes paid on farm machinery. The cross- reference to the
definition of farm machinery was amended to reflect the 1999 recodification of
part of G. S. 105- 164.4( a)( 1d) as G. S. 105- 164.4A. Farm machinery subject to
the 1% sales tax rate is set out in G. S. 105- 164.4A instead of G. S. 105-
164.4( a)( 1d).
( Effective September 14, 2001; SB 165, ss. 11 and 53, S. L. 01- 414.)
G. S. 105- 151.22 – Ports Tax Credit Extended: The sunset on this credit, which
had expired for taxable years ending after February 28, 2001, was extended.
The credit now sunsets for taxable years beginning on or after January 1, 2003.
( Effective for taxable years beginning on or after March 2, 2000; HB 1388, ss. 1
and 2, S. L. 01- 517.)
G. S. 105- 151.24 – Two- step Increase in Credit for Children: This statute was
amended to make a two- step increase in the tax credit for a dependent child for
whom the taxpayer is allowed to claim a personal exemption. The first step is
effective for taxable years beginning on or after January 1, 2002, and increases
North Carolina Department of Revenue
Tax Administration Page 34 2001 Tax Law Changes
the credit from $ 60 to $ 75. The second step is effective for taxable years
beginning on or after January 1, 2003, and increases the credit from $ 75 to
$ 100. The adjusted gross income eligibility limits that apply to the credit remain
the same.
( Effective for taxable years beginning on or after January 1, 2002; SB 1005, s.
34.20 ( a) and ( b), S. L. 01- 424.)
G. S. 105- 151.27 – Repeal of Child Health Insurance Credit: The credit for
child health insurance was repealed effective for the 2001 tax year. This repeal
was recommended by the North Carolina Efficiency and Loophole- Closing
Commission, co- chaired by former Governors Jim Holshouser and Bob Scott and
former State Treasurer Harlan Boyles. The Commission recommended the
repeal as a means of providing more funds for North Carolina’s Health Choice
Program. The Commission believed that the State could provide health
insurance to more children by shifting the dollars that were being indirectly
appropriated by the tax credit to increased funding for the State’s Health Choice
Program. The tax credit was refundable and was complex.
( Effective for taxable years beginning on or after January 1, 2001; SB 1005, s.
34.21( a) and ( b), S. L. 01- 424.)
X. TAX CREDITS FOR QUALIFIED BUSINESS INVESTMENTS
G. S. 105- 163.013( g) – Technical Change: This subsection was amended to
delete a reference to the Legislative Research Commission and insert a
reference to the Revenue Laws Study Committee. This change reflects the
creation in 1999 of the Revenue Laws Study Committee as a permanent,
statutory committee. Before that change, the Revenue Laws Study Committee
operated under the umbrella of the Legislative Research Commission.
( Effective September 14, 2001; SB 165, ss. 12 and 53, S. L. 01- 414.)
North Carolina Department of Revenue
Tax Administration Page 35 2001 Tax Law Changes
XI. WITHHOLDING OF INCOME TAX
G. S. 105- 163.6 ( b) and ( c) – More Monthly Payments of Withholding Taxes:
Subsections ( b) and ( c) of this section were amended to move more taxpayers
from quarterly filing to monthly filing of withholding taxes. The purpose of the
changes is require more taxpayers to remit taxes more frequently, thereby
shifting the receipt of some tax revenue from the 2002- 03 fiscal year into the end
of the 2001- 02 fiscal year. When a taxpayer is changed from a quarterly filing
status to a monthly filing status, the State receives two months of withheld taxes
one fiscal year sooner.
Subsection ( b) was amended to require an employer who withholds an average
of less than $ 250 of State income taxes from wages each month to file a return
and pay the taxes on a quarterly basis. Subsection ( c) was amended to require
an employer who withholds an average of at least $ 250 but less than $ 2,000
from wages each month to file a return and pay the taxes on a monthly basis. .
Before these changes, the threshold for distinguishing quarterly filers from
monthly filers was $ 500 instead of $ 250. The change is expected to convert
about 70,000 quarterly taxpayers into monthly taxpayers.
( Effective January 1, 2002; HB 232, s. 5, S. L. 01- 427.)
XII. ESTIMATED INCOME TAX – CORPORATIONS
G. S. 105- 163.41( a) – Clarifying Change: This subsection was amended to
clarify that, in determining whether a corporation is subject to the penalty for
underpayment of estimated income tax, the amount of income tax imposed is the
net amount of income tax after reducing the tax by allowable tax credits.
( Effective September 14, 2001; SB 165, s. 13, S. L. 01- 414.)
North Carolina Department of Revenue
Tax Administration Page 36 2001 Tax Law Changes
XIII. SALES AND USE TAX
G. S. 105- 164.3 – Definition Changes: The language in this section preceding
the list of definitions was amended to make it conform to the standard statutory
language used to designate a list of definitions and numerous changes were
made to the definitions. Some definitions were revised, some were recodified,
some were added, and some were repealed.
Because of the number of new definitions added and repealed, Section 18( c) of
S. L. 01- 476 authorized the Codifier of Statutes to change the format of all the
definitions in this section to match the format of the new definitions and to
renumber the definitions to keep them in alphabetical order. Pursuant to this
instruction, the Codifier took two actions. The Codifier changed the format of the
definitions to match that of the new definitions and the existing definitions in G. S.
105- 164.3( 6b), ( 6d), ( 8), ( 8b), ( 16b), and ( 20). The new standard format sets out
the term to be defined, followed by a period, a dash, and then the definition. The
Codifier also renumbered all the definitions to eliminate letters after numbers.
The reformatting and renumbering affects all definitions in this section.
The changes to the definitions are as follows and become effective as noted
after each definition.
Business – ( 1). This definition was reformatted by the Codifier as part of the
changes to apply a standard format to G. S. 105- 164.3. No change was made to
the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Candy – ( 2)( New). This definition was added by the legislation enabling North
Carolina to become a member of the national Streamlined Sales Tax Project.
The definition matches the definition of candy adopted by that Project. The
definition sets out the ingredients that constitute candy; these ingredients do not
include flour.
Prior law did not include a definition of candy. A definition of candy was enacted
so candy can be identified and taxed differently from other types of food, if the
General Assembly chooses to do so. The 2001 General Assembly made no
changes in the taxation of candy. Candy that is purchased for home
consumption and would be exempt if purchased under the federal Food Stamp
Program remains exempt from State tax and the Mecklenburg ½ % Public Transit
Tax.
The legislation adding this definition designated it as ( 2a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 2) instead of ( 2a).
North Carolina Department of Revenue
Tax Administration Page 37 2001 Tax Law Changes
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Clothing – ( 3)( New). This definition was added to implement the new sales tax
holiday set out in new G. S. 105- 164.13C. During the holiday, clothing with a
sales price of $ 100 or less is exempt from State and local sales and use taxes.
The definition of clothing matches the definition of clothing adopted by the
national Streamlined Sales Tax Project. The term is defined as all human
wearing apparel suitable for general use. The Project definition contains an
exhaustive list of items that are included in the definition. The Department will
administer this definition in accordance with that list of items.
The legislation adding this definition designated it as ( 2b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 3) instead of ( 2b).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
Clothing accessories or equipment – ( 4)( New). This definition was added to
implement the new sales tax holiday set out in new G. S. 105- 164.13C. During
the holiday, clothing with a sales price of $ 100 or less is exempt from State and
local sales and use taxes but clothing accessories and equipment are subject to
tax. The definition of clothing accessories and equipment matches the definition
of the term adopted by the national Streamlined Sales Tax Project. The term is
defined as incidental items worn on the person or in conjunction with clothing.
The Project definition contains an exhaustive list of items that are included in the
definition. The Department will administer this definition in accordance with that
list of items.
The legislation adding this definition designated it as ( 2c). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 4) instead of ( 2c).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
Consumer – ( 5) ( Was 3). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3 and
to arrange all the definitions in alphabetical order without using letters to
designate any of the definitions. No change was made to the meaning of the
definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 38 2001 Tax Law Changes
Cost Price – Former ( 4). This definition was repealed. It is replaced by the
definition of “ purchase price” set out in subdivision ( 33) of this section. The new
term “ purchase price” has the same meaning as the prior term “ cost price.” Even
before the addition of the term “ purchase price,” the statutes used the terms
“ cost price” and “ purchase price” interchangeably. G. S. 105- 164.6( a)( 1), for
example, used the term “ cost price” and G. S. 105- 164.6( b) used the term
“ purchase price.”
( Effective January 1, 2002; SB 165, ss. 14 and 53, S. L. 01- 414.)
Delivery charges – ( 6)( New). This definition was added by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition matches the definition of delivery charges adopted by
that Project. As defined, the term means all charges imposed by a retailer for
preparation and delivery of personal property or services to a location designated
by the consumer.
As a result of the repeal of G. S. 105- 164.12, all transportation charges will be
taxable without regard to where shipment originates, where title passes, or how
the property is shipped. Under prior law, delivery charges were not taxable if title
passed to the purchaser at the point of origin.
The legislation adding this definition designated it as ( 4a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 6) instead of ( 4a).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Dietary supplement – ( 7)( New). This definition was added by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition is a simpler version of the definition adopted by that
Project but has the same meaning as the definition adopted by that Project. A
dietary supplement is a product that is intended to supplement the diet of
humans and is required to be labeled as a dietary supplement under federal law.
A definition of dietary supplement was enacted so these items can be identified
and taxed differently from other types of food, if the General Assembly chooses
to do so. The 2001 General Assembly made no changes in the taxation of
dietary supplements. These items are subject to State and local sales and use
taxes.
North Carolina Department of Revenue
Tax Administration Page 39 2001 Tax Law Changes
The legislation adding this definition designated it as ( 4b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 7) instead of ( 4b).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Direct- to- home satellite service – ( 8)( New). This definition was added as a result
of the levy of a 5% State sales and use tax under G. S. 105- 164.4( a)( 7) on direct-to-
home satellite services. The term is defined as “ programming transmitted or
broadcast by satellite directly to the subscribers’ premises without the use of
ground equipment or distribution equipment, except equipment at the
subscribers’ premises or the uplink process to the satellite.”
The legislation adding this definition designated it as ( 4a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 8) instead of ( 4a).
( Effective January 1, 2002; SB 1005, s. 34.17, S. L. 01- 424; SB 748, s. 18( c),
S. L. 01- 476.)
Engaged in business. – ( 9)( Was 5). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Food – ( 10)( New). This definition was added by the legislation enabling North
Carolina to become a member of the national Streamlined Sales Tax Project.
The definition matches the definition of food adopted by that Project, with one
technical difference. The Project definition of food states that the term does not
include alcoholic beverages. The Project definition of food excludes alcoholic
beverages so that the exemption many states have for food will not automatically
apply to alcoholic beverages as well.
The definition of food set out in this subdivision includes alcoholic beverages so
that the scope of the local prepared food taxes in North Carolina is not
inadvertently decreased. The local prepared food taxes in this State use the
definition of food set out in the State sales tax statutes as the starting point for
the levy of the tax. If alcoholic beverages are not included in the definition of
food, the local taxes must impose a tax on alcoholic beverages as well as on
prepared food to be able to tax alcoholic beverages. The relevant local acts
could be amended to do this, but the same result is achieved with fewer changes
to the local acts by including alcoholic beverages in the definition of food.
North Carolina Department of Revenue
Tax Administration Page 40 2001 Tax Law Changes
The definition of food is broad and is not tied to the federal Food Stamp
Program. Various categories of food, such as candy and dietary supplements,
are also defined to enable the General Assembly to make choices about what to
tax and what to exempt from tax.
The legislation adding this definition designated it as ( 5a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 10) instead of ( 5a).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; HB 748, s. 3,
S. L. 01- 489; SB 748, s. 18( c), S. L. 01- 476.)
Food sold through a vending machine – ( 11)( New). This definition was added by
the legislation enabling North Carolina to become a member of the national
Streamlined Sales Tax Project. The definition matches the definition of food sold
through a vending machine adopted by that Project. This definition was enacted
so that food sold through a vending machine can be identified and taxed
differently from other types of food, if the General Assembly chooses to do so.
The 2001 General Assembly made no changes in the taxation of food sold
through a vending machine. These items are subject to State and local sales
and use taxes based on 50% of their sales price.
The legislation adding this definition designated it as ( 5b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 11) instead of ( 5b).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Gross sales - ( 12)( Was 6). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Hub – ( 13)( Was 6b). This definition was renumbered by the Codifier as part of
the changes to apply a standard format to G. S. 105- 164.3. No change was
made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
In this State – ( 14)( Was 6c). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 41 2001 Tax Law Changes
Interstate air courier – ( 15)( Was 6d). This definition was renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Interstate passenger air carrier – ( 16)( Was 6e). This definition was renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Lease or rental – ( 17)( Was 7a). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Mail order sale – ( 18)( Was 7b). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Major recycling facility – ( 19)( Was 8). This definition was renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Manufactured home – ( 20)( Was 8a). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Mobile telecommunications service – ( 21)( New). This definition was added by
the legislation that consolidated the taxes on telecommunications into a 6%
State sales tax. The definition mirrors the definition of this term in the federal
Mobile Telecommunications Sourcing Act. As defined, mobile
telecommunications service is a radio communication service carried on between
North Carolina Department of Revenue
Tax Administration Page 42 2001 Tax Law Changes
mobile stations or receivers and land stations and by mobile stations
communicating among themselves.
The legislation adding this definition designated it as ( 8b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 21) instead of ( 8b).
( Effective January 1, 2002; HB 571, s. 13, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Moped – 22 ( Was 8b). This definition was renumbered by the Codifier as part of
the changes to apply a standard format to G. S. 105- 164.3. No change was
made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Motor vehicle – ( 23)( Was 8c). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Net taxable sales. – ( 24)( Was 9). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Nonresident retail or wholesale merchant – ( 25)( Was 10). This definition was
reformatted and renumbered by the Codifier as part of the changes to apply a
standard format to G. S. 105- 164.3. No change was made to the meaning of the
definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Person – ( 26)( Was 11). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Prepaid telephone calling arrangement – ( 27)( New). This definition was added
by the legislation that simplified the taxes on telecommunications. Its purpose is
to identify these arrangements so they can be taxed as tangible personal
North Carolina Department of Revenue
Tax Administration Page 43 2001 Tax Law Changes
property. The term is defined as a right that is paid for in advance, enables the
origination of phone calls by means of an access number, authorization code, or
similar means, and is sold in units or dollars whose number or dollar value
declines with use and is known on a continuous basis. A prepaid calling card is
an example of a prepaid telephone calling arrangement.
The legislation adding this definition designated it as ( 11a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 and
designated this definition as ( 27) instead of ( 11a).
( Effective January 1, 2002; HB 571, s. 1, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Prepared food – ( 28)( Was 11b). This definition was rewritten by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The rewritten definition matches the definition of prepared food
adopted by that Project. The rewritten definition deletes the phrase “ and drink”
from the defined term but has the same meaning as the prior definition.
The legislation adding this definition designated it as ( 11a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 28).
( Effective January 1, 2002; SB 144, s. 2.3, S. L. 01- 347; SB 748, s. 18( c), S. L.
01- 476.)
Prescription drug – ( 29)( Was 11b). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Production company – ( 30)( Was 11c). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Protective equipment – ( 31)( New). This definition was added to implement the
new sales tax holiday set out in new G. S. 105- 164.13C. During the holiday,
certain clothing is exempt from State and local sales and use taxes but protective
equipment is subject to tax. The definition of protective equipment matches the
definition of the term adopted by the national Streamlined Sales Tax Project.
The Project definition contains an exhaustive list of items that are included in the
North Carolina Department of Revenue
Tax Administration Page 44 2001 Tax Law Changes
definition. The Department will administer this definition in accordance with that
list of items.
The legislation adding this definition designated it as ( 11d). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 31).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
Purchase – ( 32)( Was 12). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Purchase price – ( 33)( New). This definition was added by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition matches the definition of purchase price adopted by
that Project. The term has the same meaning as “ sales price” when applied to
an item subject to use tax.
The legislation adding this definition designated it as ( 12a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 33).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Retail sale or sale at retail – ( 34)( Was 13). This definition was rewritten by the
legislation enabling North Carolina to become a member of the national
Streamlined Sales Tax Project. The rewritten definition matches the definition of
retail sale or sale at retail adopted by that Project. The revised definition
expands the defined term from “ retail” to “ retail sale or sale at retail,” but makes
no substantive change in the law.
The legislation rewriting this definition kept the designation of the definition as
( 13). The Codifier of Statutes, however, renumbered all the definitions in G. S.
105- 164.3 to put them in their proper alphabetical order and changed the
designation of this definition to ( 34).
( Effective January 1, 2002; SB 144, ss. 2.4 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 45 2001 Tax Law Changes
Retailer – ( 35)( Was 14). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Sale or selling – ( 36)( Was 15). This definition was reformatted and renumbered
by the Codifier as part of the changes to apply a standard format to G. S. 105-
164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Sales price – ( 37)( Was 16). This definition was rewritten by the legislation
enabling North Carolina to become a member of the national Streamlined Sales
Tax Project. The definition matches the definition of sales price adopted by that
Project. The revised definition lists items that are included in subpart a. and lists
items that are not included in subpart b. Four of the exclusions from tax that
were contained in this definition are now set out in G. S. 105- 164.13 as
exemptions. New subdivision ( 47) of G. S. 105- 164.13 exempts bottle deposits
from tax, new subdivision ( 48) of that section exempts deposits on certain
replacement parts from tax, new subdivision ( 49) exempts separately stated
installation charges from tax, and new subdivision ( 50) exempts from tax 50% of
the sales price of most items sold through a vending machine.
The only substantive change made as a result of rewriting the definition affects
cash discounts. Under the prior definition, cash discounts were included in the
sales price and tax was due on the sales price without regard to the discount.
Under the revised definition, cash discounts are not considered to be part of the
sales price.
The legislation rewriting this definition kept the designation of the definition as
( 16). The Codifier of Statutes, however, renumbered all the definitions in G. S.
105- 164.3 to put them in their proper alphabetical order and changed the
designation of this definition to ( 37).
( Effective January 1, 2002; SB 144, ss. 2.5 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Secretary – ( 38)( Was 16a). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 46 2001 Tax Law Changes
Service address – ( 39)( New). This definition was added by the legislation that
consolidated the taxes on telecommunications into a 6% State sales tax. The
definition mirrors the federal definition of this term. As defined, the service
address is the location of telecommunications equipment from which a customer
originates or receives telecommunications service. If the service provider cannot
determine the location of the equipment, such as with mobile
telecommunications, the location of the equipment may be determined based on
the telephone number of the customer, the mailing address, or the street
address.
The legislation adding this definition designated it as ( 16b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 39).
( Effective January 1, 2002; HB 571, s. 1, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Soft drink – ( 40)( New). This definition was added by the legislation enabling
North Carolina to become a member of the national Streamlined Sales Tax
Project. The definition matches the definition of soft drink adopted by that
Project. The definition differs from the definition of soft drink that applied in the
repealed soft drink excise tax previously imposed under Article 2B of Chapter
105.
This definition was enacted so that soft drinks can be identified and taxed
differently from other types of food, if the General Assembly chooses to do so.
The 2001 General Assembly made no changes in the taxation of soft drinks.
The legislation adding this definition designated it as ( 16b). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 40).
( Effective January 1, 2002; SB 144, ss. 2.2 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
Special mobile equipment – ( 41)( Was 16b). Two acts passed in the 2001
Session affected the number and format of this definition but not its substance.
Chapter 347 changed the designation of this section from ( 16b) to ( 16c) to
accommodate the addition by that act of other definitions to G. S. 105- 164.3.
Chapter 476 gave the Codifier of the Statutes the authority to renumber and
reformat all the definitions in G. S. 105- 164.3. The Codifier exercised this
authority, changed the format of the definition to the new standard format, and
changed the designation of this definition to ( 41).
North Carolina Department of Revenue
Tax Administration Page 47 2001 Tax Law Changes
( Effective January 1, 2002; SB 144, ss. 2.7 and 3.2, S. L. 01- 347; SB 748, s. 18,
S. L. 01- 476.)
Sport or recreational equipment – ( 42)( New). This definition was added to
implement the new sales tax holiday set out in new G. S. 105- 164.13C. During
the holiday, certain clothing is exempt from State and local sales and use taxes
but sport or recreational equipment is subject to tax. The definition of sport or
recreational equipment matches the definition of the term adopted by the
national Streamlined Sales Tax Project. The Project definition contains an
exhaustive list of items that are included in the definition. The Department will
administer this definition in accordance with that list of items.
The legislation adding this definition designated it as ( 16e), but gave the Codifier
of the Statutes the authority to renumber all the definitions in G. S. 105- 164.3.
The Codifier exercised this authority, renumbered all the definitions in G. S. 105-
164.3 to put them in their proper alphabetical order, and changed the
designation of this definition to ( 42).
( Effective January 1, 2002; SB 748, s. 18, S. L. 01- 476.)
State agency – ( 43)( Was 16c). Two acts passed in the 2001 Session affected
the number of this definition but not its substance. Chapter 347 changed the
designation of this section from ( 16c) to ( 16d) to accommodate the addition by
that act of other definitions to G. S. 105- 164.3. Chapter 476 gave the Codifier of
the Statutes the authority to reformat and renumber all the definitions in G. S.
105- 164.3. The Codifier exercised this authority, changed the format of the
definition to the new standard format, and changed the designation of this
definition to ( 43).
( Effective January 1, 2002; SB 144, ss. 2.7 and 3.2, S. L. 01- 347; SB 748, s. 18,
S. L. 01- 476.)
Storage – ( 44)( Was 17). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Storage and use; exclusion – ( 45)( Was 19). This definition was reformatted and
renumbered by the Codifier as part of the changes to apply a standard format to
G. S. 105- 164.3. No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 48 2001 Tax Law Changes
Tangible personal property – ( 46)( Was 20). This definition was renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Taxpayer – ( 47)( Was 20). This definition was reformatted and renumbered by
the Codifier as part of the changes to apply a standard format to G. S. 105- 164.3.
No change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Telecommunications service – ( 48)( New). This definition was added by the
legislation that consolidated the taxes on telecommunications into a 6% State
sales tax. The definition mirrors the federal definition of this term. As defined,
telecommunications service is the transmission, conveyance, or routing of voice,
data, audio, video, or any other information or signals to a point, or between or
among points, by or through any electronic, radio, satellite, optical, microwave, or
other medium regardless of the protocol used for the transmission, conveyance,
or routing.
The legislation adding this definition designated it as ( 21a). The Codifier of
Statutes, however, renumbered all the definitions in G. S. 105- 164.3 to put them
in their proper alphabetical order and changed the designation of this definition
to ( 48).
( Effective January 1, 2002; HB 571, s. 1, S. L. 01- 430; SB 748, s. 18( c), S. L. 01-
476.)
Use – ( 49)( Was 18). This definition was reformatted, renumbered, and
amended. The amendment adds “ distribution” to the list of activities that
constitute “ use” for sales and use tax purposes. This addition is a change from
prior law. The change brings North Carolina law in line with the United States
Supreme Court decision in the case of D. H. Holmes. Under the rewritten
definition, use tax is due when an in- state retailer contracts with an out- of- state
printer to print catalogues or other material and mail the material directly from the
printer’s place of business to customers of the retailer in North Carolina.
Chapter 476 of the 2001 Session Laws gave the Codifier of the Statutes the
authority to reformat and renumber all the definitions in G. S. 105- 164.3. The
Codifier exercised this authority, changed the format of the definition to the new
standard format, and changed the designation of this definition to ( 49) so that it
is in the proper alphabetical order.
( Effective January 1, 2002; SB 144, ss. 2.6 and 3.2, S. L. 01- 347; SB 748, s.
18( c), S. L. 01- 476.)
North Carolina Department of Revenue
Tax Administration Page 49 2001 Tax Law Changes
Use tax – ( 50)( Was 22). This definition was reformatted and renumbered by the
Codifier as part of the changes to apply a standard format to G. S. 105- 164.3. No
change was made to the meaning of the definition.
( Effective January 1, 2002; SB 748, s. 18( c), S. L. 01- 476.)
Utility – ( Former 25). This definition was repealed because it is no longer used.
The statutes that applied this term were rewritten in the 2